Contemporary issues in international banking : regulatory capture, financial contagion, and excessive risk-taking

Abstract

The 2008 global financial crisis has reshaped the landscape of international banking. Subsequent to the widespread government bailout, series of regulatory reforms have taken place aimed to reduce risk-taking activities in the banking industry. Structural reforms are also introduced aiming at separating high-risk investment banking from low-risk retail banking and restricting bank exposure to hedge funds investments and private equity. The thrust of capital market reforms attempts to reshape bank behavior through transporting OTC derivatives onto exchanges, transforming post-trade execution of many financial instruments, and reassigning the roles of many bank and market operators. Almost concurrently, accounting standard setters have been addressing this issue through adjusting disclosure rules. Market discipline, functions through market-based incentive schemes, is another device affecting bank behavior. Literature on reputational penalties lends considerable support to this role. It is rather surprising that banks, subject to market discipline, prudential regulation and accounting regulation, still continuously expose new problems and pose great challenge to regulators. Recent series of market manipulation scandals involved the majority of systemically important banks suggest that the ethics of individuals to the entire sector is questionable. Meanwhile, our understanding of the interlinkages between the various parts of banking sector remains limited because research on banking industry has been hampered by the complexity of the concerned problems and the lack of integration between different perspectives. In light of these aforementioned major changes and regulatory innovations, abundant opportunities emerge for further research that addresses these issues. This dissertation aims to provide comprehensive and timely overview and discussion of key issues in international banking. It focuses on three key and challenging issues in banking regulation and consists of three chapters themed on regulatory capture, financial contagion, and excessive risk-taking, respectively. The departure point of this dissertation is the LIBOR scandal, which offers an ideal setting to understanding bank behavior and the underpinning of regulation through linking the present evidence to the historical account. Further, Chapter 2 empirically tests the capital market reaction to the LIBOR scandal and identifies reputational effect and contagion effect of bank misconduct, links such outcome of market discipline to the role of legal enforcement, and illuminates on the theme of the interplay of market and institutional setting and its impact on bank behavior. Lastly, Chapter 3 extends the enquiries into banks’ derivatives usage and risk in relation to the increasingly discussed topic on the impact of interplay of accounting and capital regulation on bank behavior.