Beyond ‘Light Touch’ Regulation of British Banks after the Financial Crisis

Abstract:     
We have reached a turning point in our efforts to regulate banks and financial institutions by resort to current risk-based models and regulatory structures. As is evident from failures during the global financial crisis that burst upon the scene in later 2007, the use of these risk based and self regulatory models has been seen by many to be seriously flawed. This failure may be attributed to many causes, such as flawed assumptions of rating agencies, the limits of model building as an exercise, and the ease with which such efforts have been compromised by behavioural and political factors that influence markets. These behavioural factors include the power of market euphoria and the influence of perverse incentives which have driven excessive risk taking. Political factors have included the uncritical commitment to self-regulation and the capacity of markets to regulate themselves. Whilst risk is an inherent feature of modern times, the question that arises here is the degree to which banking regulation should depend exclusively upon the use of narrow (an inevitably imperfect) mathematical risk models and the extent to which these need to be supplemented by the application of legal rules as well as other regulatory techniques that have emerged from the study of corporations and professionals. However, the limits of law as a mechanism for social ordering should also not be over-estimated. Other factors, such as the existence of mutual trust and an appreciation of wider stakeholder interests are also important ingredients of any effective regulatory system. This has led to calls for more responsive forms of regulation, although little of this work has focussed much upon the banking and finance sectors. This paper explores these themes which call for a more nuanced approach to corporate law and regulation of banks and other financial institutions.

Number of Pages in PDF File: 24

Keywords: Global Financial Crisis, Banking Regulation, Risk, Market Failure, Corporate Law

JEL Classification: K22, G18, G21, G28, G38

Accepted Paper Series