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Synopsis

The research problem

The Basel framework has been a significant development in the world of banking and finance, and it is imperative to have a firm understanding of these regulations and their implications for empirical accounting research, particularly as they relate to bank capital and capital requirements.

Motivation

The motivation of this paper is to advance the understanding of the role of accounting in post-GFC bank regulations and to empower researchers by improving their understanding of the regulatory process and their understanding of regulatory resources.

Target population

Global banks, bank regulators, and bank standard setters.

Adopted methodology

This paper aims to provide an overview of the interactions between bank accounting and prudential regulation, focusing specifically on post-GFC regulations such as Basel III.

Findings

I document differences between bank regulation and financial reporting standards, which are in a constant state of flux. Differences manifest themselves in definitional distinctions, such as the fact that bank capital is not the same as equity, the scope of application and associated data availability, the standard setting process, and stakeholder interests. The disparities are dynamic and specific to each country or jurisdiction, which adds complexity to the research process. Despite the efforts of the Basel Committee to establish unified standards, there has been an increasing divergence in the implementation of global banking rules. These developments present new research opportunities.

This paper addresses the following question: Are banks special firms that can achieve their goals only with high leverage, above and beyond what is considered acceptable for industrial corporations?

This question is related to the issue of the cost of capital and how it is affected by leverage. If we accept the Modigliani–Miller (M&M) theorem (1958), then the capital structure is irrelevant for both the cost of capital and the value of the bank. Specifically, the M&M hypothesis argues that higher levels of equity capital reduce bank leverage and risk, leading to an offsetting decline in banks’ cost of equity capital. Hence, we ask the question whether banks are special firms such that M&M theorem does not apply to banks.

We show that M&M propositions cannot be applied for banks primarily because of explicit guarantees and subsidies that provide incentives for increasing leverage. Then, some of the risk faced by the bank is transferred at no cost to the providers of these guarantees and subsidies, giving banks the incentive to increase leverage as much as they can. We show that under perfect market conditions, when risk is fairly priced, this opportunity vanishes.

Most of the studies in corporate governance in banks and other types of firms investigate board diversity and quality separately, without considering the possible relationship between these two. To fill this gap, this study investigates through a new methodological approach the level of quality and diversity of the boards of a sample of Italian banks using a proprietary hand-collected database; in addition, it examines the relationship between diversity and quality of boards to verify whether more diversity consistently relates to higher quality, in accordance with the regulatory approach.

Evidence shows that especially small and mutual banks need to improve quality and diversity, as they probably suffer from their limited attractiveness to top profile directors. Moreover, on analyzing interrelations we find evidence of a positive association between board diversity and quality. In particular, financial skills and experience of directors improve the qualitative level of banking boards.

The global financial crisis of 2008-09 has stimulated a number of re-assessments of global development. But after two years, not much progress has been made in dealing with the deep causes of the crisis. While it is better understood now why the crisis occurred, more progress is needed in terms of financial reform on the global level in order to prevent future financial crises. A remaining challenge is to strengthen the global financial architecture (GFA). This paper focuses on the GFA and its relationship to the global financial crisis. Recent reform initiatives are discussed. Strong resistance against re-regulation of the financial sector is noted, reflecting the general opposition of vested interests to GFA reform.

The following sections are included:

• Introduction
• Reserve Requirements — An Overview
• Research Design and Methodology
• Robust Regression Results
• Conclusion
• Notes
• References
• Appendix A
• Appendix B
• Appendix C
• Appendix D
• Appendix E

The following sections are included:

• INTRODUCTION
• REGULATORY DEVELOPMENTS
• CHALLENGES FOR REGULATORS
• IMPACT ON ASIAN BANKS
• FUTURE IMPLICATIONS
• CONCLUSION
• NOTES
• ANNEX A
• REFERENCES