The SSM and the prudential regime of non-performing loans

In the aftermath of the global financial crisis, the rapid rise of non-performing loans (NPLs) showed the fragility of the banking system and the lack of harmonized regulatory regime to address the systemic risk of failing banks. The deterioration of NPLs in the balance sheet of credit institutions represents a real concern for the supervisory authorities and constitutes a challenge for regulators and market actors. This chapter examines the supervision of NPLs taking into consideration the architecture of Single Supervisory Mechanism (SSM) and the role of European Central Bank (ECB) to monitor non-performing exposures. The new supervisory toolkit implemented in the European Banking Union aims to improve the classification of asset quality and to establish common practices to resolve NPLs. This chapter argues that the intricate structure of the preventive measures to reduce the risk of lending defines a new landscape in the prudential treatment of NPLs

Rescuing failing banks for financial stability: the unintended outcomes of bail-in rules

The regulatory architecture of the EU Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) introduced rules necessary to prevent financial instability and systemic risk contagion. However the restructuring tools for failing banks, namely bail-in, precautionary recapitalisation and resolving plans are largely flexible to allow Member States to adopt domestic policy measures to rescue distressed institutions. This leaves broad discretion to national competent authorities to provide public financial support, a legacy of the bail-out programmes that can undermine the new EU bank insolvency regime

Rethinking financial regulation: an appraisal of regulatory approaches in the UK and EU

This article explores different regulatory approaches that have shaped regulation in the run-up to and aftermath of the 2007-09 global financial crisis. In doing so it seeks to clarify and cast fresh light upon the shifting regulatory and practitioner discourse. This in turn is intended to aid reflection on how these ap- proaches might best be adopted, adapted or synchronised to achieve the aims of financial regulation. The first part of this article examines the approaches from a theoretical perspective, discussing their strengths and weaknesses. The second part of the article analyses regulation in practice, focussing primarily on rules-based regulation and principles-based regulation. As a practical example, the article looks at the MiFID directive – a cornerstone of securities regulation – within the EU and UK jurisdictional context. The article concludes with observations and comments on how these approaches might best be coordinated to achieve the broader regulatory agenda

Digital payments system and market disruption

The traditional banking functions of lending, deposit-taking and payment intermediation are being unbundled in the new frontiers of money that extend from virtual currencies to crypto-assets and from shadow payments to quasi-money. The possibility for digital-centred change in the financial industry is illustrated by distributed ledger technology, of which ‘blockchain’ is the most prominent example of automated decision-making. Other forms of decentralised supply of money, payment services, and funding processes may allow households and businesses to obtain loans and pool risks without having recourse to financial intermediaries. This article examines the alternative provision of access to low-cost zero-friction payments from the perspective of the underbanked. Promoting innovation through alternatives to credit means integrating vulnerable and excluded customers into mainstream financial systems. Blockchain technology backed by a possible modification of the law on the recognition and transfer of property rights might prove instrumental in unlocking the value of the assets possessed by the underbanked or even the unbanked

The disclosure regime of credit rating agencies: an obscure veil of compliance?

Following the inaccurate evaluation of the default risk of certain financial products—such as subprime mortgages and derivatives — that affected the stability of securities markets, the reliability of credit rating agencies (CRAs) has been questioned. CRAs’ activities have exhibited a lack of due diligence and deficiency in their assessment of corporations’ creditworthiness. Moreover, this underscores the failings of the issuer-agency relationship that characterises the ratings business model. This relationship is fraught with major conflicts of interest because the purposes of issuers with regard to their ratings often do not square with investors’ need to receive reliable ratings information. This article argues that CRAs exhibit potential conflicts of interest because they have a financial incentive to accommodate the preferences of bond issuers owing to the fact that the rater is selected and paid by the issuer. This heavy dependence gives rise to ratings inflation and inaccuracy. What is crucial for the raters and, needless to say, the markets is to increase the quality of publicly available information before it is used in a rating assessment

The use of technology in corporate management and reporting of climate-related risks

Sustainable finance and climate change have emerged as areas of renewed interest in the wake of the global financial crisis, when the assessment of companies’ risk management was shown to be the key to the prevention of systemic disruption. While many aspects of corporate disclosures were radically and quickly revised following the crisis, even several years later commentators have pointed to a continuing pressure for improvement to regulatory requirements in relation to financial statements. Much of the debate focuses on the need for expedited operational execution of reporting information. Over the past decade significant advances have taken place in digital technologies, especially with respect to the security and processing of granular data. This article examines how these new technologies can be deployed in a manner that will address the need to eliminate the vulnerabilities of the climate risk management process, which requires standardisation of data in order to improve managerial decision-making and the desired outcomes. It further explores the use of technology to enhance the evaluation of climate change impact on company exposures, and to advance transparency in regulatory reporting for financial institutions. Technology applications such as automated language systems offer opportunities to align corporate disclosure with climate change policy objectives, which in turn can increase sustainability in the performance of companies’ activities

Recasting Credit Rating Agencies’ Responsibility: Suggestions for Reform

PhDThe credit rating agencies (CRAs) have become major players in the financial markets yet their reputations have been tarnished by certain assessments issued during the 2007-2009 financial crisis. There is therefore a clear need to regulate the practice of the highly influential, though at times inaccurate, ratings of these agencies. The overriding proposition is that CRAs should be liable for the issuance of inaccurate ratings. The analysis maps the contours of the legal aspects of the credit ratings market before addressing the major questions regarding a CRA’s modus operandi. It is argued that CRAs are capable of bringing about potential distortions in the financial sector, thereby resulting in a reduction in market confidence which, in turn, influences negotiations and expectations. In this regard, a civil liability regime for CRAs could constitute a system of investor protection over and above traditional regulation. The purpose of this thesis is to demonstrate that the present system for regulating CRAs in the US, the UK and the EU is defective in terms of information asymmetries, an absence of transparency, conflicts of interest and limited competition. The thesis considers whether an effective liability regime through the ‘estoppel rule’ could be a valid option in the case of CRAs. In this light, the thesis attempts to demonstrate that CRAs should be regulated having due regard to their potential systemic threat. Further, the thesis suggests that CRAs should be subject to professional standards similar to those applicable to other information intermediaries such as auditors and financial analysts. The idea is that CRAs should be made responsible for their investment certification because of their fundamental role in the evaluation of credit risk and their influence on confidence and decisions in the market. The research brings forth a range of recommendations aimed at reforming the current regulatory frameworkModern Law Review Scholarship 2014

Restructuring non-performing loans for bank recovery: private workouts and securitisation mechanisms

Resolving regimes of non-performing loans (NPLs) have raised concerns among supervisory authorities and banking regulators. NPLs play a central role in the linkages between poor lending and credit risks. A high stock of NPLs is undesirable to investors which can lead a decrease in the stock price, profitability loss and potentially to a distressed scenario. In the aftermath of the global crisis, the early resolution of NPLs requires coordinated insolvency proceedings and harmonised restructuring tools. The EU legislation introduced minimum loss coverage layers of capital for NPLs to address newly formed losses. This article argues that there is a need to enhance private arrangements within the resolution of deteriorated debts – alternative to public support such as asset management companies and securitisation mechanisms – which in turn would make it more manageable to reduce the NPL on banks’ balance sheet