Banks, knowledge and crisis: a case of knowledge and learning failure

Purpose – Regulators such as Turner have identified excessive securitization, high leverage, extensive market trading and a bonus culture, as being major factors in bringing about the bank centred financial crisis of 2007-2009. Whilst it is inevitable that banks adopt procyclical business strategies, not all banks took excessive risks and subsequently had to be rescued by taxpayers. The paper examines the extent to which individual bank outcomes can be attributed to systematic differences in banking knowledge concerning the primary risks and value drivers of their organisations by bank board directors and top management. Design/methodology/approach – The paper reviews a wide range of theoretical, historical and empirical literatures on banking models and detailed case analyses of failing and non-failing banks. A framework for understanding the role and application of knowledge in banking is developed which suggests how banks, despite their pro-cyclical business strategies, are able to institutionalise learning and actively create new knowledge through time to improve bank organisation, intermediation and risk management. Findings – The paper finds that a lack of basic knowledge of banking risks and value drivers by the boards and senior managers of the failing banks were implicated in the banking crisis. These knowledge problems concerned banks' understanding of their organisation, intermediation and risk management in an active market setting characterised by rapid economic and organisational change. Thus, the failing banks ignored or were unaware of this knowledge and hence experienced acute difficulties with learning the new knowledge needed to address the new problems thrown-up by the financial crisis. Practical implications – The analysis suggests that addressing this knowledge gap via the institutionalisation of banking knowledge ought to constitute an important element of any sustainable solution to the problems currently being experienced by the banking sector. By ensuring greater bank learning, knowledge creation, and knowledge use, governments and regulators could help reduce individual bank risk and the likelihood of future crisis. Originality/value – In contrast to the claims made by some politicians and banking insiders, the analysis indicates that the banking crisis and its severity were neither unpredictable nor unavoidable since some banks, by institutionalising banking knowledge and history of past crises, successfully avoided the pitfalls experienced by the failing banks

International Framework for Liquidity Risk Measurement,Standards and Monitoring:Corporate Governance and Internal Controls

This paper is structured in accordance with identified components which are considered to be essential to the successful implementation of the (two fold) topics of discussion of this paper, namely, monitoring and liquidity risk measurements. The importance of successfully communicating results obtained from monitoring and measuring such risks, and the role of corporate governance in ensuring such effective communication, constitutes a recurring theme throughout this paper. The identified components are as follows: i) Corporate governance (ii) Internal controls (iii) Disclosure (iv) Management of risk (v) Substance over form (vi) Transparency As well as highlighting the interdependence of these components, the paper also aims to accentuate the importance of individual components. Whilst no hierarchy of importance is assigned to these components, corporate governance and internal controls are two components which are analysed in greater depth (than other components). Furthermore, corporate governance could be accorded a status of greater importance than internal controls having regard to the fact that whilst internal controls relate to a very vital control aspect of an organisation, corporate governance relates to all processes – be it decision making, control, production, performance, within a company/bank. The paper will also attempt to demonstrate that it is possible to implement a system of regulation which combines increased formalised procedures and/or detailed rules - whilst giving due consideration to the substance of transaction

Plain English Movement, The Plain English Movement: Panel Discussion

One of the dominant events between 1975 and today in United States consumer law was the birth of what has become known as the plain English movement . For centuries lawyers have been derided for the nature of their prose. A word will not suffice where two or even three can take its place; long sentences are preferable to short ones; Latin, or perhaps medieval French, are preferable to English. The plain English movement is the name given to the first effective effort to change this and to write legal documents, particularly those used by consumers, in a manner that can be understood, not just by the legal technicians who draft them, but by the consumers who are bound by their terms. One can date the beginning of the plain English movement with some accuracy. On January 1, 1975, Citibank of New York introduced a plain English consumer promissory note. A team of businessmen, lawyers and language consultants had stripped the prior version, a dense and essentially unreadable document, of many substantive provisions and cleansed the remaining verbiage. Citibank knew it was on to something. The form was introduced at a major press conference which received television coverage. The note did indeed hit a responsive chord. It received national, and even international, attention. It was particularly welcomed by consumer activists who saw it as a major break- through in terms of consumer communication. Inevitably, a bill was introduced in the New York legislature requiring that Citibank\u27s contribution be mandated as a matter of law. The bill, in fact, referred only to promissory notes and provided that all such obligations would have to be written in the form of the Citibank note. Citibank, understandably flattered, nevertheless opposed the bill. Happily, it was not passed. The bill and then the law were highly criticized, indeed ridiculed, for the vagueness of the language standard. How can a draftsman know what is clear or coherent or common or everyday? What is clear to one (a lawyer, for instance) may well not be clear to another. If the standard were related to the understanding of a specialized group, the law could undercut its own purpose. Surely an already overburdened court system would become immobilized testing whether the words in consumer contracts were common and everyday. Thus did the critics attempt to make a mockery of the statute and reduce what was at least the germ of a good idea to nonsense. Why the statute did not glut the New York courts and how New York converted its contracts from legalese to plain English with minimal turmoil we will address at a later point

The Complexity Dilemma in Policy Market Design

Regulators are increasingly pursuing their policy objectives by creating markets. To create a policy market, regulators require firms to procure a product that is socially useful but that confers little direct private benefit to the acquiring party. Examples of policy markets include pollutant emissions trading programs, renewable energy credit markets, and electricity capacity markets. Existing scholarship has tended to analyze policy markets simply as market-based regulation. Although not inaccurate, such inquiries are necessarily incomplete because they do not focus on the distinctive traits of policy markets. Policy markets are neither typical regulations nor typical markets. Concentrating on policy markets as a distinctive type of market brings to light common characteristics of such markets, which in turn generates insights into how they can be used more effectively to implement policy. In particular, this Article focuses on a recurring fundamental challenge in policy market design: managing complexity. Typical markets manage complexity through market forces. As a regulatory creation, however, policy markets require regulators to manage their complexity. This poses what we call the complexity dilemma, which requires regulators to balance strong pressures both toward and away from complexity. The central argument of this Article is that although policy markets are an important part of a regulator’s toolkit, they are also subject to complexity that limits their usefulness. Understanding the complexity dilemma and its crucial role in policy market design forms an essential step toward progress in improving the design and function of these markets

Establishing a European securities regulator: is the European Union an optimal economic area for a single securities regulator?

The paper’s purpose is to address the economic, institutional, and legal issues confronting the establishment of a more centralised approach to EU securities regulation and to suggest that the theory of optimum currency areas can be used as a model to assess the economic benefits and costs of further centralisation of securities regulation in the European Union. The European Union’s Financial Services Action Plan seeks to achieve an integrated market in financial services in order to accomplish the economic and political objectives of the Treaty of Rome. The FSAP is premised on the notion that the adoption of legal and regulatory measures to achieve liberalisation in cross-border trade in financial services will also achieve integration of EU financial markets. This paper argues that liberalisation of financial markets does not necessarily lead to integration of financial markets. Furthermore, it argues that the institutional design and scope of financial regulation should be based, in part, on the extent of integration in the financial market. That is, the domain of the regulator should be the same as the domain of the market. European capital and financial markets remain fragmented and segmented. This paper argues therefore that, until EU financial markets become more integrated, a single EU securities regulator would not be an efficient or effective institutional model for EU securities markets. In other words, at present, the EU is not an optimal economic area for a single securities regulator

The Frontiers of Peer-to-Peer Lending: Thinking About a New Regulatory Approach

The growth of online alternative lending presents several advantages for both those seeking credit and those with excess capital to lend. Over the past decade, several different models of peer-to-peer lending have emerged in the US and U.K. Each of these models has developed in response to the different regulatory system it faces, which has led to the models’ different risk and reward profiles. However, the current regulatory framework for regulating peer-to-peer lending, especially in the U.S., leaves much to be desired. The inadequate regulatory regime not only hampers the potential for growth and further innovation in the industry, but also creates risks for consumers, lenders, and, as the sector grows, entire markets. There is no clear or easy answer as to the optimal regulatory regime, but regulators should at least consider the basic functions of peer-to-peer lending and how to address risks with a more comprehensive and sensible model for regulation