The Role of Central Banks and Competition Policies in the Rescue and Recapitalisation of Financial Institutions During (and in the Aftermath of) the Financial Crisis

Recent years have witnessed a change in focus from considerations of factors which could impede competition, for example over-regulation, to the need to strike a balance between over-regulation and insufficient regulation – in order to provide the right level of safety for consumers (such that they are protected from risky investments). A driving force behind the need for deregulation over the past two decades has been the objective and desire to foster competition. Re-regulation thereafter assumed centre stage in some jurisdictions in response to the need to manage cross sector services' risks more efficiently. Rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position which the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid. The importance attached to maintaining and promoting financial stability - as well as the need to facilitate rescue and restructuring measures aimed at preventing systemically relevant financial institutions from failure, demonstrate how far authorities are willing to overlook certain competition policies. However increased government and central bank intervention also simultaneously trigger the usual concerns – which include moral hazard and the danger of serving as long term substitutes for market discipline. An interesting observation derives from the relationship between State aid grants, competition, and the potential to induce higher risk taking levels. Whilst the need to promote and maintain financial stability is paramount, safeguards need to be implemented and enforced to ensure that measures geared towards the aim of sustaining system stability (measures such as lender of last resort arrangements and State rescues) do not unduly distort competition as well as induce higher risk taking levels. This paper will draw attention to safeguards which have been provided by the Commission where approval is considered for the grant of State aid to financial institutions whose problems are attributable to inefficiencies, poor asset liability management or risky strategies. Whether the distinction drawn by the Commission – with regards to the preferential grant of recapitalisation packages to fundamentally sound banks (which require less restructuring measures)is justified, will also be considered. How far central banks and governments should intervene and how far distortions of competition should be permitted ultimately depends on how systemically relevant a financial institution is

Pluralism and Deformalisation as Mechanisms in the Achievement of More Equitable and Just Outcomes – the Move from „Classical Formalism“ to Deformalisation.

By tracing the development and evolvement of certain legal theories over the centuries, as well as consequences emanating from such developments, this paper highlights how and why a shift from the model of „classical formalism“ towards more deformalised models has arisen. The paper also illustrates how deformalisation and „a corresponding loss of certainty“ could be harnessed in order to provide for greater „realism“ and externalities, whilst still attaining a respectable level of consistency. Developments and efforts aimed at exploring the applicability of classical formalism and deformalised models should be regarded as „an endeavour to establish a consistency of terms, as well as a probing into how far principles, notions, and rules for decision making can be generalised, and rectification when generalisations have gone too far.“ Unity, as well as „a common law of mankind“ are goals which are still capable of being achieved even where fragmentation, diversification and pluralisation of the law occur. Such processes of specialisation, where correspondingly countered by the appropriate level of generality as well as the ability to apply rules – such that they are consistently applied in similar situations, are capable of achieving more equitable, just and unifying goals as opposed to a model which merely strives for the achievement of legal certainty. Looking beyond the borders of legal theory may indeed provide the much needed redress in situations where generalisations exceed the required limits

Financial Regulation and Risk Management:Addressing Risk Challenges in a Changing Financial Environment

Amongst other goals, this paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. In addressing the problems posed as a result of the difficulty in quantifying risks, it will consider means whereby risks can be quantified reasonably without the consequential effects which result from the dual nature of risk, that is, risks emanating from the management of institutional risks. “Socio cultural” explanations which relate to how risk is increasingly becoming embedded in organisations and institutions will also be considered as part of those factors attributable to why the financial environment has become transformed to the state in which it currently exists. A consideration of regulatory developments which have contributed to a change in the way financial regulation is carried out, an illustration of how the financial industry and the approach to financial regulation have been transformed by the rapid growth of the hedge funds industry, will also constitute focal points of the paper

Development of Auditing in Malaysia:Legal,Political and Historical Influences

This work investigates the role and contribution of external auditing as practised in the Malaysian society during the forty year period from independence in 1957 to just before the onset of the Asian Financial Crisis in 1997. It applies the political economic theory introduced by Tinker (1980) and refined by Cooper & Sherer (1984), which emphasises the social relations aspects of professional activity rather than economic forces alone. In a case study format where qualitative data was gathered mainly from primary and secondary source materials, the study found that the function of auditing in the Malaysian society in most cases is devoid of any essence of mission; instead it is created, shaped and changed by the pressures which give rise to its development over time. The largely insignificant role that it serves is intertwined within the contexts in which it operates

The Financial Services Authority:A Model of Improved Accountability?

Prior to the adoption of the FSA (Financial Services Authority) model, supervision of UK banks was carried out by the Bank of England. Although the Bank of England's informal involvement in bank supervision dates back to the mid nineteenth century, it was only in 1979 that it acquired formal powers to grant or refuse authorization to carry out banking business in the UK. Events such as the Secondary Banking Crisis of 1973-74 and the Banking Coordination Directive of 1977 resulted in legislative changes in the form of the Banking Act 1979. Bank failures through the following years then resulted in changes to the legislative framework. This article looks into the claim that the FSA model has improved in terms of accountability in comparison to its predecessor, the Bank of England. It considers the impact the FSA has made on the financial services sector and on certain legislation since its introduction. Through a comparison with the Bank of England, previous and present legislation, reports and other sources, an assessment is made as to whether the FSA provides more accountability. Evidence provided here supports the conclusion that the FSA is both equipped with better accountability mechanisms and executes its functions in a more accountable way than its predecessor

The Need for the Adoption of International Financial Reporting Standards: Some Explanations For the Pace of Implementation

Whilst the impact of globalisation and harmonisation is currently being witnessed around the globe, and the need to embrace the adoption of International Financial Reporting Standards (IFRSs) is becoming increasingly evident, certain jurisdictions have been much quicker in their embrace, adoption and adaptation of International Financial Reporting Standards, than others. As well as highlighting the need for the adoption of International Financial Reporting Standards, this paper also aims to provide an explanation for the pace of response in the adoption and adaptation of IFRSs in selected jurisdictions. It does so partly through a consideration of the impact of accounting and finance theories which have impacted the standard setting systems of certain jurisdictions

Extending the Scope of Prudential Supervision: Regulatory Developments during and beyond the “Effective” Periods of the Post BCCI and the Capital Requirements Directives.

The main argument of this paper is, namely, the need for greater emphasis on disclosure requirements and measures – particularly within the securities markets. This argument is justified on the basis of lessons which have been drawn from the recent Financial Crises, one of which is the inability of bank capital requirements on their own to address funding and liquidity problems. The engagement of market participants in the corporate reporting process, a process which would consequently enhance market discipline, constitutes a fundamental means whereby greater measures aimed at facilitating prudential supervision could be extended to the securities markets. Auditors, in playing a vital role in financial reporting, as tools of corporate governance, contribute to the disclosure process and towards engaging market participants in the process. This paper will however consider other means whereby transparency and disclosure of financial information within the securities markets could be enhanced, and also the need to accord greater priority to prudential supervision within the securities markets. Furthermore, the paper draws attention to the need to focus on Pillar 3 of Basel II, namely, market discipline. It illustrates how through Pillar 3, market participants like credit agencies can determine the levels of capital retained by banks – hence their potential to rectify or exacerbate pro cyclical effects resulting from Pillars 1 and 2. The challenges encountered by Pillars 1 and 2 in addressing credit risk is reflected by problems identified with pro cyclicality, which are attributed to banks’ extremely sensitive internal credit risk models, and the level of capital buffers which should be retained under Pillar Two. Such issues justify the need to give greater prominence to Pillar 3. As a result of the influence and potential of market participants in determining capital levels, such market participants are able to assist regulators in managing more effectively, the impact of systemic risks which occur when lending criteria is tightened owing to Basel II's procyclical effects. Regulators are able to respond and to manage with greater efficiency, systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. This being particularly the case when such firms decide to cut back on lending activities, and the decisions of such firms cannot be justified in situations where such firms’ credit risk models are extremely sensitive – hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements. In elaborating on Basel II's pro cyclical effects, the gaps which exist with internal credit risk model measurements will be considered. Gaps which exist with Basel II's risk measurements, along with the increased prominence and importance of liquidity risks - as revealed by the recent financial crisis, and proposals which have been put forward to mitigate Basel II's procyclical effects will also be addressed

Co-operative and Competitive Enforced Self Regulation: The Role of Governments, Private Actors and Banks in Corporate Responsibility.

In considering why practices which stimulate incentives for private agents to exert corporate control should be encouraged, this paper highlights criticisms attributed to government control of banks. However the theory relating to the “helping hand” view of government is advanced as having a fundamental role in the regulation and supervision of banks. Furthermore, governments have a vital role to play in corporate responsibility and regulation given the fact that banks are costly and difficult to monitor – this being principally attributed to the possibility that private agents will lack required incentives or the ability to supervise banks. Through its supervision of banks, governments also assume an important role where matters related to the fostering of accountability are concerned – not only because banks may have the power to affect firm performance, but also because some private agents are not able to afford internal monitoring mechanisms. Through the Enforced Self Regulation model, the paper attempts to highlight the role played by government in the direct monitoring of firms. In proposing the Co-operative and Competitive Enforced Self Regulation model, it attempts to draw attention to the fact that although such a model is based on a combination of already existing models and theories, the absence of effective enforcement mechanisms will restrict the maximisation potential of such a model. The primary theme of the paper relates to how corporate responsibility and accountability could be fostered through monitoring and the involvement of governments in the regulation of firms. It illustrates how structures which operate in various systems, namely, stock market economies and universal banking systems, function (and attempt) to address gaps which may arise as a result of lack of adequate mechanisms of accountability. Furthermore it draws attention to the impact of asymmetric information (generally and in these systems), on levels of monitoring procedures and how conflicts of interests which could arise between banks and their shareholders, or between governments and those firms being regulated by the regulator, could be addressed