The Global Financial Crisis of 2007-9 revealed a number of weaknesses in the existing framework for banking regulation both at a national and an international level. Since then, intensive efforts have been undertaken to improve regulation, in particular the Basel III initiative that is now coming into operation. One important aspect of Basel III is that regulators should focus not only on risk adjusted capital ratios of banks, but also the unadjusted ratio of capital to assets, the so-called leverage ratio. Leverage ratios were widely ignored before the subprime crisis but were in fact shown to be warnings of risk for many banks, whose risk adjusted ratios were favourable. Excessively optimistic ratings given to structured products, and also to excessive optimism built into credit risk models may have underlay this pattern.
In this context, Brunel academics Philip Davis and Dilly Karim of the Department of Economics and Finance obtained a grant from the Bank of England to research important aspects of current regulatory developments, including the utility of the proposed leverage ratio in respect of financial stability when the effect of bank competition on risk is taken into account. A preliminary version of their research (co-authored by PhD candidate Dennison Noel) was presented at a conference held on July 11th and financed by Brunel University.
This conference featured contributions from some of the world’s leading authorities on bank behaviour and bank regulation, and provided a critical overview of the nexus of regulation, competition and risk in banking, including issues relating to Basel III and the leverage ratio. Contributors included, first, distinguished academic experts in the field of Banking and Finance, namely Claudia Girardone (University of Essex), Panicos Demetriades (University of Leicester, and formerly Governor of the Bank of Cyprus) and Alistair Milne (University of Loughborough); second, we heard from key senior officials from key central banks, namely Olivier de Bandt (Banque de France), Michael Straughan (Bank of England) and Jonathan Acosta Smith (European Central Bank, now Bank of England); and thirdly from eminent banking industry experts Patricia Jackson (Lloyds of London) and Laurie Mayers (Moody’s Investors Services).
The conference featured presentations on key topics relating to leverage ratios, risk and profitability (by Smith, Jackson and Milne), stress tests and resolution (de Bandt and Demetriades), competition in investment banking and the Eurozone (Mayers and Girardone) and finally bank competition and risk (Davis/Karim/Noel, and Straughan). All of the presentations except one are available for download below.
The work is of considerable interest to all those interested in developments in Bank Regulation, be they in academia, public authorities or the financial services industry.
The timing of the conference coincided with an expansion of research and teaching expertise in banking and finance in the Department of Economics and Finance, linked in turn to the launch of a new BSc degree in Banking and Finance in academic year 2018-2019, to complement our existing MSc in Banking and Finance .
Download conference presentations by clicking on the links below:
E Philip Davis