The role of market discipline in handling problem banks

This paper considers the conditions that are necessary for market discipline to complement prompt corrective action (PCA) by the authorities in handling problem banks. We initially consider precisely what market discipline means in this context, who exercises it and the preconditions that are necessary for it to operate effectively. We explore the incentives that are necessary for PCA and market discipline to reinforce rather than cancel each other and in particular consider the limits to market discipline in this context from corporate governance and from difficulties in valuation. While our analysis is primarily aimed at advanced countries, we also examine problems in emerging markets and how deposit insurance arrangements might conflict with the aims of both PCA and market discipline.market discipline; banks; prompt corrective action

The role of market discipline in handling problem banks

This paper considers the conditions that are necessary for market discipline to complement prompt corrective action (PCA) by the authorities in handling problem banks. We initially consider precisely what market discipline means in this context, who exercises it and the preconditions that are necessary for it to operate effectively. We explore the incentives that are necessary for PCA and market discipline to reinforce rather than cancel each other and in particular consider the limits to market discipline in this context from corporate governance and from difficulties in valuation. While our analysis is primarily aimed at advanced countries, we also examine problems in emerging markets and how deposit insurance arrangements might conflict with the aims of both PCA and market discipline.market discipline, banks, prompt corrective action

Introduction

On October 24, 2003, SUERF celebrated its 40th anniversary in the Galerie Dorée of the Banque de France with an especially high level and rich seminar. The memorable occasion was further elevated by Jean Claude Trichet giving the tenth SUERF Annual Lecture in his last public speech as Governor of the Banque de France, prior to taking over as President of the European Central Bank. This study brings together in slightly edited form the four papers presented at the seminar and the Annual Lecture.

The New Economics of Banking

All aspects of banking business are being radically transformed and to an extent that is changing the fundamental economics of the banking firm and the banking industry. This is because of three dominant factors: a series of powerful pressures acting simultaneously; technology is changing the very core of banking business: infor-mation advantages, processing, moni-toring, delivery, etc; and because, as a result of these pressures, competition is increasingly developing from outside the traditional banking industry. The paper reviews the pressures impinging on the economics of banking and considers their implications for the structure of the banking industry; the business operations of banks, and the structure of the banking firm.

Is there a Future for Regional Banks and Regional Exchanges? The Strategies of Selected Austrian Finance Institutions

1) D.T. Llewellyn, " The future for small & regional banks in Europe" 2) R. Ortner, " What future for regional banks?" 3) H. Stepic, " The Strategy of RZB in Central and Eastern Europe" 4) St. K. Zapotocky, " The challenges and chances of regional exchanges" It has been argued that the combination of technological advance, the European Single Market, the advent of EMU and, more generally, the reality of a global financial community, is undermining the competitive position of small, regional financial organisations, be they banks, stock exchanges or other financial entities. This line of argument leads to the conclusion that there is no viable business future for the small. This SUERF Study offers points of view to the contrary, both from the academic and " practitioners" angle. Professor David Llewellyn contributes the academic view, strongly arguing that size per se is not the issue but rather that efficient, well focused small and medium-sized financial institutions remain viable. Representatives of three regional financial institutions in Austria were asked to discuss elements of their business strategy to substantiate their belief in the viability of their institution's future. The contribution by Reinhard Ortner (Erste Bank) is based on a talk he gave on the occasion of the 22nd SUERF Colloquium in Vienna in 2000, and that of Helmut Stepic (Raiffeisen Zentralbank) on a speech at the Alpbacher Banking Seminar in 2001. The consolidation and concentration process has, of course, also engulfed stock exchanges and many of the small ones have already been pronounced terminally ill. Stefan Zapotocky (Wiener Börse AG) is firm in his view that regional exchanges will have a viable future catering for regional financing needs. His contribution is based on a presentation at the SUERF Salzburg Seminar of 2002, which dealt with the future of regional exchanges

Regulation of European Banks and Business Models: Towards a new paradigm? CEPS Paperbacks. June 2012

Amidst talks of establishing an EU-wide banking union, the recent changes in the regulatory framework and the rethinking of the future of European banking structure, the future of EU bank regulation is inextricably linked to banks’ business models. Using a sample of over 70 banks, which overlaps with those subjected to the EBA’s 2011 stress tests, this report emphasizes the key regulatory gaps that emerge from a comprehensive analysis of the soundness and performance of bank business models and provides policy-makers with guidance to reinforce the evolving regulatory framework in European banking

Future Risks and Fragilities for Financial Stability

In March 2012 a conference, organised jointly by the ICFR and SUERF, on "Future Risks and Fragilities for Financial Stability", explored what the next pressure points for financial stability might be, how these may arise from the response to the last financial crisis, and how the industry and the regulators can prepare for them. In order to discuss this theme, the conference brought together a select group of academics, industry practitioners and policymakers to discuss a range of connected issues, mainly incentives and market discipline, regulation, competition and shadow banking, and size and structure of business models

The Epidemiology of Staphylococcus aureus and Panton-Valentine Leucocidin (pvl) in Central Australia, 2006-2010

Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. The Creative Commons Public Domain Dedication waiver (http://creativecommons.org/publicdomain/zero/1.0/) applies to the data made available in this article, unless otherwise stated.Background: The Central Australian Indigenous population has a high incidence of Staphylococcus aureus bacteremia (SAB) but little is known about the local molecular epidemiology. Methods: Prospective observational study of bacteremic and nasal colonizing S.aureus isolates between June 2006 to June 2010. All isolates underwent single nucleotide polymorphism (SNP) genotyping and testing for the presence of the Panton-Valentine Leucocidin (pvl) gene. Results: Invasive isolates (n = 97) were predominantly ST93 (26.6 %) and pvl positive (54.3 %), which was associated with skin and soft tissue infections (OR 4.35, 95 % CI 1.16, 16.31). Non-multiresistant MRSA accounted for 31.9 % of bacteremic samples and showed a trend to being healthcare associated (OR 2.16, 95 % CI 0.86, 5.40). Non-invasive isolates (n = 54) were rarely ST93 (1.9 %) or pvl positive (7.4 %). Conclusions: In Central Australia, ST93 was the dominant S.aureus clone, and was frequently pvl positive and associated with an aggressive clinical phenotype. Whether non-nasal carriage is more important with invasive clones or whether colonization occurs only transiently remains to be elucidated

Corporate Governance in Financial Institutions

On 29th - 30th March 2007, SUERF and the Central Bank of Cyprus jointly organized a Seminar: Corporate Governance in Financial Institutions. The papers in the present publication are based on a sample of the presentations at the Seminar. Together, the papers illuminate a number of key issues in corporate governance in a variety of financial firms. In the first paper based on a keynote address, Spyros G. Stavrinakis, Central Bank of Cyprus gives an overview of the legal framework for corporate governance in financial institutions in Cyprus. According to a Central BankDirective issued in 2006, implementation of corporate governance principles is mandatory for all banks incorporated in Cyprus and their overseas branches and for some Cyprus branches of foreign banks domiciled outside the European Economic Area. Banks are obliged to have a robust internal governance framework, consistent lines of reporting and effective risk identification, management, monitoring and reporting procedures for all the risks to which credit institutions are actually or potentially exposed. The board of directors should take the lead in establishing and approving ethical standards and corporate values for itself and for the bank's senior executive management. Potential conflicts of interest should be identified, prevented or appropriately managed. Each bank should maintain a compliance function that monitors compliance with rules, regulations and policies. Clear lines of responsibility and accountability should be set and enforced. New members of the board of directors as well as the senior executive managers of banks have to be vetted and approved by the Central Bank of Cyprus for their " fitness and properness." In order to ensure transparency concerning the implementation of the principles, each bank's corporate governance framework should be disclosed in the bank's annual report and on its public website. In the second paper by Christian Harm, University of Muenster, "The Governance of the Banking Firm" the author builds on the literatures on corporate governance and financial regulation. In relation to governance of financial institutions, agency theory has both merits and shortcomings. It provides good explanations in many delegation situations but it has severe difficulties in dealing with institutions with several stakeholders and complex objective functions for the management. Firms guided by shareholder value may work more effectively than firms guided by stakeholder cacophony. Depositors are important stakeholders in banks. Since they are typically incapable of managing the supervision of their claims on the bank, they rely on regulators to do it for them. Remuneration systems for bank managers should provide proper incentives. According to the author, incentives should be structured such as to reward particular strategic achievements. Banks can apply executive stock option plans, but should confine options to a secondary place behind other long-term incentives based on success criteria that further shareholder interests without compromising the regulatory mission. Such an incentive framework tends, however, to be very complex so that the general ambiguities associated with the concept of governance could imply that in the banking firm, selecting managers with a proper intrinsic motivation may be superior to defining complex remuneration programs. In the third paper "Corporate Governance Issues in Non-Shareholder Value Financial Institutions: ACase Study of Mutual Building Societies in the UK", David T. Llewellyn, Loughborough University, focuses on corporate governance in non-incorporated financial firms. The author describes the relevant stakeholders and the nature of agency problems in different types of financial firms. He compares monitoring mechanisms, incentives, abilities and feasibilities of managers and members of mutuals. Mutuality raises specific corporate governance issues: Corporate governance is less clearly defined because the firm's objectives are less clearly defined. Conflicts of interest between managers and owners are less easily identified and it is more difficult to create management incentives. The almost exclusive source of capital is retained profits and each member has a non-exclusive and non-marketable claim to residual net worth. Voting rights are typically not proportional to the size of the ownership stake. There is no market in ownership claims and therefore no effective market in corporate control. Consequently, there is ample scope for mutuals to be inefficient. There is, however, no evidence that the efficiency and performance of mutuals are poorer that that of incorporated financial firms. In the fourth paper "Corporate Governance in Emerging Market Banks", Bridget Gandy, Fitch Ratings Ltd., and her co-authors from the rating agency look at the framework for corporate governance of banks in a sample of emerging market countries. Since the crisis in the late 1990s in Latin America and Asia, there has been a marked improvement in corporate governance of financial institutions in the regions under observation. Many countries have taken legal steps to develop functioning market economies with a view to the need to satisfy the demands of international capital markets. Several banks have listed their shares on stock exchanges in developed markets and foreign bank ownership and involvement in local banking systems have increased. In Central and Eastern Europe, countries' desire for EU-accession has impacted on the development of their corporate governance systems. At the individual bank level, Fitch Ratings looks at bank board independence and quality, oversight and the importance of related party transactions, the integrity of the audit process, acceptability of executive and director remuneration, ownership structures and transparency. In evaluating the quality of governance at the country level, the authors apply a three-pillar approach in line with Montesquieu: Powers and responsibilities need to be separated between a representative legislature, a competent and accountable executive branch and a fair and independent judiciary. The paper contains an interesting table in which a number of key regulatory initiatives in a sample of emerging market countries are compared. The authors point out that large scale privatizations have reduced the importance of state-owned banks in many countries. There are, however, still several examples with complex holding structures involving banks with potential negative implications for corporate governance quality and problems with related party transactions. Acquisitions by foreign banks with developed corporate governance standards have generally had a positive impact and also listing of bank shares on foreign stock exchanges with tough disclosure and transparency requirements have contributed positively to the quality of corporate governance in emerging market banks. Read together, the four papers give a good overview of the development of corporate governance practices and remaining problems in financial institutions of different types and with domicile in different countries