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Improving risk management at the European Central Bank and Bank of England

Professor Philip Davis and Dr Dilruba Karim have conducted research on bank competition, capital and risk. Their research demonstrated a clear link between bank competition and institutional and sectoral risk and also concluded that the leverage ratio is an important indicator of bank risk, which had been widely disregarded by authorities.

The innovative research enabled the European Central Bank (ECB) to make significant improvements within their operational structures. The ECB changed their assessment of strategic risk and boosted the focus of their macroprudential surveillance which subsequently mitigated potential harm to the European financial system.

Nationally, Prof. Davis and Dr Karim’s research has improved the Bank of England’s ability to predict a wide range of risks in the banking system by enhancing their approach to risk evaluation.

As a result, the Bank of England is now able to interpret better the use of the leverage ratio as a way to reduce banking sector risk.