New Regulation of the Financial Industry

298 Pages·2000·2.107 MB·English

by  Dimitris N. Chorafas (auth.)

New Regulation of the
Financial Industry
Dimitris N. Chorafas
New Regulation of the Financial Industry
Also by Dimitris N. Chorafas
FINANCIAL MODELS AND SIMULATION: Concepts, Processes and Technology
HANDBOOK OF COMMERCIAL BANKING: Strategic Planning for Growth and
Survival in the New Decade
New Regulation of the
Financial Industry
Dimitris N. Chorafas
First published in Great Britain 2000 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS and London
Companies and representatives throughout the world
Acatalogue record for this book is available from the British Library.
ISBN 978-1-349-41676-9 ISBN 978-0-333-97743-9 (eBook)
DOI 10.1057/9780333977439
First published in the United States of America 2000 by
ST. MARTIN’S PRESS, INC.,
Scholarly and Reference Division,
175 Fifth Avenue, New York, N.Y. 10010
ISBN 978-0-312-22899-6
Library of Congress Cataloging-in-Publication Data
Chorafas, Dimitris N.
New regulation of the financial industry / Dimitris N. Chorafas.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-312-22899-6 (cloth)
1. Banks and banking, International—Law and legislation. 2. Financial services
industry—Law and legislation. I. Title.
K1066 .C49 1999
332.1—dc21
99–050145
©Dimitris N. Chorafas 2000
Reprint of the original edition 2000
All rights reserved. No reproduction, copy or transmission of this publication may be made
without written permission.
No paragraph of this publication may be reproduced, copied or transmitted save with written
permission or in accordance with the provisions of the Copyright, Designs and Patents Act
1988, or under the terms of any licence permitting limited copying issued by the Copyright
Licensing Agency, 90 Tottenham Court Road, London W1P0LP.
Any person who does any unauthorised act in relation to this publication may be liable to
criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as the author of this work in accordance with
the Copyright, Designs and Patents Act 1988.
This book is printed on paper suitable for recycling and made from fully managed and sustained
forest sources.
10 9 8 7 6 5 4 3 2 1
09 08 07 06 05 04 03 02 01 00
Contents
List of Figures x
List of Tables xii
Foreword xiii
Acknowledgements xvi
Part One The Regulation of Financial Institutions
1 The Evolving Role of Regulators in the Banking Industry 3
1 Introduction 3
2 A closer look at the regulators’ role and their contribution 4
3 The expanding notion of regulating the markets in
an Internet setting 8
4 The synergy of credit risk and market risk 11
5 The information economy and the role of global
networks in finance 14
6 The phase shift in the market calls for new regulatory
policies and procedures 18
7 Regulating the partnership between credit institutions and
hedge funds 20
2 The Search for a New Global Financial Architecture 23
1 Introduction 23
2 The doubts arising from disfunctioning rules and markets 24
3 Reflections on a new global financial architecture 27
4 The moral hazard posed by a fire-brigade approach 32
5 There is a synergy between monetary policy, exchange rates
and bank supervision 35
6 The deposit insurance solution in America which could serve
as a model 38
7 The Federal Reserve System provides a good background for
restructuring the IMF 40
3 Systemic Risk, Bank Supervision and Follow-the-Sun Overdraft 46
1 Introduction 46
2 Reasons underpinning systemic risk 47
3 The follow-the-sun overdraft 51
4 Systemic risk as a result of subprime lending by
financial markets 53
5 Coping with liquidity risks without igniting inflation 56
v
vi Contents
6 The model of the Resolution Trust Corporation and the
avoidance of systemic risk 59
4 Structuring the Regulatory Environment: Examples from
the United States 63
1 Introduction 63
2 From the Sherman Act for free trade to rules targeting the
control of risk 64
3 Establishing rigorous rules for risk disclosure 67
4 The difficult act of regulating the over-the-counter market 69
5 The changing regulatory landscape in the USA 72
6 Private Securities Litigation Reform Act of 1995 74
5 Changes in Bank Legislation: Examples from Germany 77
1 Introduction 77
2 Changes to the German Banking Act and their consequences 78
3 The redefinition of specific duties through the
Sixth Act Amendment 80
4 The prudential value of information on loans 83
5 The contribution of the Sixth Act Amendment to
the introduction of the euro 86
6 Other challenges connected to the euro,
the ins and the pre-ins 88
Part Two The Many Aspects of Bank Supervision
6 Hands-On Experience with Bank Supervision 93
1 Introduction 93
2 A closer look at the different supervisory models in
G-10 countries 95
3 Common elements in the supervision of banks and
public companies 98
4 Financial examination programmes: on-site auditing
versus monitoring 100
5 Benefits derived from a collaborative effort in
banking supervision 103
6 The risk of conflicting rules and regulations 105
7 The Integration of Supervisory Duties by the Financial
Services Authority: An Example from Britain 110
1 Introduction 110
2 Understanding the fact that regulation is in
full evolution 111
3 Fundamental changes in the Financial Services and
Markets Bill 114
4 The new powers of the Financial Services Authority 116
Contents vii
5 The Financial Services Authority and the role of regulators
in controlling risk 118
6 The supervisory scrutiny of poor management practices 120
8 Cross-Border Supervision of Banks, Non-Banks and
Internet Commerce 124
1 Introduction 124
2 Cross-border supervision, internet commerce and
knowledge management 125
3 Day trading, technology and the global market place 128
4 An example using emerging products: the valuation of
Internet stocks 132
5 A horde of issues: from financial engineering to
fees rewarding inefficiency 135
6 Hedge funds, junk funds and big losses 137
7 Should the hedge funds industry be regulated? 139
9 Rigorous Approaches to the Management of Financial
Risk Factors 142
1 Introduction 142
2 The strategic importance of risk management with
derivative financial instruments 143
3 The monitoring and reporting of derivatives risk 145
4 Critical questions in analysing the options book 148
5 Regulatory action and the Year 2000 problem 151
6 Supervisory authorities which have been alert regarding
Year 2000 exposure 155
10 Model Risk and the Control of Eigenmodels by
the Supervisors 158
1 Introduction 158
2 The challenge modelling solutions pose to regulators and
to the bank’s own board 159
3 Basic notions to keep in perspective when modelling
the real world 162
4 Errors in financial modelling and model risk 166
5 The control of eigenmodels by the Swiss Federal
Banking Commission 167
6 Regulation of eigenmodels by the Austrian supervisors 170
Part Three The Capital Base of Financial Institutions
11 Rethinking and Revamping the 1998 Capital Accord:
A New Capital Adequacy Framework 175
1 Introduction 175
2 The flat 8 per cent capital adequacy by the
Basle Committee and its challengers 176
viii Contents
3 A New Capital Adequacy Framework by Basle Committee on
banking supervision 179
4 Enriching the supervisory review of Capital Adequacy
through external and internal rating 182
5 Diversification is good, other things being equal 185
6 Why capital reserves, risk profiles and
prudent management correlate 188
7 The Capital Adequacy Directive of the EU 191
8 The brewing regulation of commodity trades and the
association with the Investment Services Directive 195
9 Six basic reasons for the revision of CAD 197
12 Central Banks, Commercial Banks and Repurchase
Agreements 200
1 Introduction 200
2 Basic features of sales and repurchase agreements 201
3 Using repurchase agreements for going short and
for other trades 203
4 The valuation of securities owned and securities sold 205
5 Regulatory and accounting practices connected with
securities lending 207
6 Is there a dividing line between custodian duties and
repurchase agreements? 210
13 Redefining Reporting Requirements and
Opening New Frontiers 212
1 Introduction 212
2 Are there critical differences between the British, American
and Swiss Regulatory Requirements? 213
3 Working Parties and the Gordian Knot cut
by the Swiss National Bank 217
4 Concepts underpinning the Bundesbank’s
Mindest Anforderungen für Handelsgesellschaften
and the cash flow method 220
5 Using simulation, experimentation and public pricing
information for compliance with the rules 223
6 Policy risk, choice of hedging and extreme events in
wealth management 226
14 Regulators and the Wave of Mergers in Banking 230
1 Introduction 230
2 A bird’s-eye view of mega bank mergers 231
3 Some merged institutions tend to create second-class clients 236
4 The aftermath of Citigroup and other mergers 240
5 Bank mergers in Canada and in Europe 243
6 After the shock: the cost of the savings and loans failure 246
Contents ix
15 Debt Management Strategies and the Restructuring of
Assets and Liabilities by Sovereigns 249
1 Introduction 249
2 The global impact of debt management policies 250
3 Who are the watchdogs for government deficits? 253
4 Positioning the national economy against the
globalisation forces 256
5 The effort to privatise the public debt 259
6 Are investments in equities by governments a good solution? 263
Index 267