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About this book

This book offers holistic, economic analysis of the on-going regulatory reform in the European banking industry. The author addresses the main opportunities and pitfalls related to post-crisis financial regulation, and investigates whether the proposed solutions provide an appropriate response to the problems within the EU’s ailing banking sector. The author gives particular focus to the implementation of Basel III, the introduction of the Banking Union, the inclusion of bank governance elements into regulatory frameworks, and the country-specific aspects of regulation at a national level. The discussion builds upon existing literature in the field and takes a novel approach in its examination of banking regulations, their endogeneity and their interactions with bank governance. The book also analyses banking regulation in the EU within theoretical frameworks, as well as by means of empirical exercises. Insights into the theory and practical aspects of banking regulation make this book a valuable read for academics, researchers, students and practitioners alike.

Table of Contents

Frontmatter

1. Theoretical Aspects of Banking Regulation

Abstract
The chapter reviews the theoretical aspects of banking regulation, depicts the main tasks of banks and provides arguments for the necessity of banking regulation. It analyses the role of banking regulations within the framework of the agency theory. It points out the purpose and functions of the respective elements of banking regulations and their importance in maintaining the stability of the banking sector. Importantly, the chapter focuses on the new, post-crisis paradigm of regulation. Particular attention is dedicated to the newly evolved, contradictory strands of the treatment of banking crises in regulations, the issue of the regulation of financial conglomerates and the Too-Big-To-Fail problem, the regulation of the shadow banking sector, the approach to systemic and endogenous risk and the need for international coordination in regulations.
Katarzyna Sum

2. Basel III: Assessment of the Guidelines for Regulatory Reform

Abstract
The chapter assesses the post-crisis Basel framework, pointing out its main benefits and drawbacks in terms of its impact on banking system stability. It addresses the issue of the risk models used for regulatory purposes, in particular discussing the features of Value at Risk, expected shortfall, stressed Value at Risk, incremental risk charge and credit valuation adjustment models. The chapter also focuses on the controversial aspects of Basel III which mainly include : the insufficiently addressed large exposure treatment; the portfolio invariance problem; the issue of sovereign risk weighting; as well as possible arbitrage resulting from the different treatment of trading and banking book positions and from the possibility of shifting bank promises between financial institutions.
Katarzyna Sum

3. Post-Crisis EU Banking Regulation: Assessment and Challenges to Implementation

Abstract
The chapter assesses the post-crisis banking regulations in the EU concerning banking supervision, capital adequacy, liquidity requirements, deposit insurance and shadow banks, and discusses the main pillars of the banking union. It assesses whether the new regulations are an appropriate response to the EU banking sector’s problems: the vicious circle between the banking and the sovereign debt crisis and changing banking integration patterns. It stresses the advantages of the new solutions, but also addresses their problematic aspects including: the regulatory treatment of sovereign risk and large exposures; the insufficient credibility of private sector involvement in the bank resolution process; and the resulting potential participation of taxpayers in absorbing the effects of banks’ failure. It also articulates the challenges for ongoing reforms.
Katarzyna Sum

4. Bank Governance in the EU: A Substitute or Complement of Banking Regulation?

Abstract
The chapter investigates the interactions between bank regulation and governance and evaluates the ongoing inclusion of governance elements in the EU regulatory framework. The chapter outlines the basic functions and elements of bank governance and analyses whether bank governance is a substitute for or complement of banking regulation within the frameworks of the agency theory and regulatory dialectics theory. It also discusses the EU regulatory acts concerning corporate governance in banks and aims at assessing the inclusion of bank governance elements concerning the board of directors, shareholders’ rights, remuneration policies and transparency requirements in the EU regulatory framework in terms of their impact on banking sector stability.
Katarzyna Sum

5. The Factors Influencing the EU Banking Regulatory Framework: Impediments for the New Regulations

Abstract
The chapter identifies the determinants of regulations and their implications for the implementation of EU rules on the national levels. It describes the regulatory process and approaches the issue of regulatory capture in the EU banking sector. To determine the factors of regulation it builds on theories of regulatory choices—the private interest theory, the public interest theory and the regulatory dialectics theory—and conducts a series of empirical exercises. It also analyses the individual cases of the consultation processes concerning the new banking regulatory acts in the EU by considering stakeholders’ participation in the regulatory procedure. Subsequently it points to the opportunities and challenges relating to the movement of the regulatory process to supranational level.
Katarzyna Sum

6. Banking Regulation and Bank Lending in the EU

Abstract
The chapter analyses the impact of the new EU regulations on credit provision. While many studies analysed the impact of capital regulations on lending, not much attention has been devoted to the role of other regulatory aspects in shaping credit expansion. The chapter endeavours to fill this void by analysing the relation between a broad array of banking regulations and lending. The study covers 886 commercial banks from 27 EU countries. It discusses the channels through which the respective elements of banking regulations influence the level and quality of bank lending. Subsequently it conducts a series of empirical exercises. On the basis of the results it draws conclusions about the effects of the ongoing regulatory changes on credit growth and finally formulates challenges for future reforms.
Katarzyna Sum

Backmatter

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