Changes are needed to plug an ‘information gap’ that currently makes it difficult to judge the relative risk exposure of different banks before problems become apparent.
In recent research, a team of risk experts at Nottingham University Business School concluded that any such revision to the regulations should ideally include requirements to disclose specific categories of information that are useful for the evaluation of risk exposure.
The Northern Rock crisis has already seen customers withdraw over £2bn of their savings from the bank since it applied to the Bank of England for emergency funds on September 13. Northern Rock’s share price had fallen by one third by close of business on Friday, September 14, and fell even further in trading on Monday, September 17.
Margaret Woods, Associate Professor at Nottingham University Business School (NUBS), said the crisis has raised a number of issues relating to the economics of banking, but also questions of risk management and the related accounting regulations.
She said: “Press comment has so far ignored one very important dimension which is the subject of research within NUBS, and that is the nature and usefulness of the information available to capital markets relating to a bank’s credit exposure and lending quality.
“NUBS researchers have identified significant variations in both the level and the usefulness of risk disclosures across the major world banks and also across the UK banking sector. The variations in disclosure are found in both bank trading books and banking books.
“Even for the very largest banks it is extremely difficult, if not impossible, for an outside party to assess aggregate risk exposures and compare this information with competitor institutions.
“The disclosures risk further potential dilution with the replacement of bank-specific accounting regulations (IAS 30) with generic disclosure rules under IFRS7. We believe that this results in a significant information gap that requires the attention of both banking and accounting regulators.
“Additionally, the adoption of sophisticated risk management systems within banking institutions does not negate, and may actually exacerbate the systemic risks within global financial markets. One obvious example is the internal use of Value at Risk models for control of market risk, which it has been suggested may increase the level of systemic risk.”
Mrs Woods said the problems highlighted by the Northern Rock crisis demonstrated the need for further consideration of:
•The role of the Bank of England as lender of last resort, and the risk of moral hazard that may encourage banks to take deploy increasingly risky strategies
•The relationship between bank liquidity and bank solvency, or the relative importance of cash flow versus collateral
•The potential limitations of existing capital-based banking regulations which largely ignore liquidity issues
•The case for extending the Basel regulatory requirements to incorporate restrictions on a bank’s dependence upon specific sources of funding
•The interface between institutional risk management and systemic risk in the financial markets
Emma Thorne | alfa
Uncovering decades of questionable investments
18.01.2018 | University of Texas at Austin, Texas Advanced Computing Center
Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO
Physicists have developed a technique based on optical microscopy that can be used to create images of atoms on the nanoscale. In particular, the new method allows the imaging of quantum dots in a semiconductor chip. Together with colleagues from the University of Bochum, scientists from the University of Basel’s Department of Physics and the Swiss Nanoscience Institute reported the findings in the journal Nature Photonics.
Microscopes allow us to see structures that are otherwise invisible to the human eye. However, conventional optical microscopes cannot be used to image...
On the way to an intelligent laboratory, physicists from Innsbruck and Vienna present an artificial agent that autonomously designs quantum experiments. In initial experiments, the system has independently (re)discovered experimental techniques that are nowadays standard in modern quantum optical laboratories. This shows how machines could play a more creative role in research in the future.
We carry smartphones in our pockets, the streets are dotted with semi-autonomous cars, but in the research laboratory experiments are still being designed by...
What enables electrons to be transferred swiftly, for example during photosynthesis? An interdisciplinary team of researchers has worked out the details of how...
For the first time, scientists have precisely measured the effective electrical charge of a single molecule in solution. This fundamental insight of an SNSF Professor could also pave the way for future medical diagnostics.
Electrical charge is one of the key properties that allows molecules to interact. Life itself depends on this phenomenon: many biological processes involve...
At the JEC World Composite Show in Paris in March 2018, the Fraunhofer Institute for Laser Technology ILT will be focusing on the latest trends and innovations in laser machining of composites. Among other things, researchers at the booth shared with the Aachen Center for Integrative Lightweight Production (AZL) will demonstrate how lasers can be used for joining, structuring, cutting and drilling composite materials.
No other industry has attracted as much public attention to composite materials as the automotive industry, which along with the aerospace industry is a driver...
08.01.2018 | Event News
11.12.2017 | Event News
08.12.2017 | Event News
23.01.2018 | Life Sciences
23.01.2018 | Earth Sciences
23.01.2018 | Physics and Astronomy