Banking Regulations and the numerous requirements imposed on banking institutions have been praised by many as indispensable in protecting the various stakeholders of the banking industry. They have also been criticized for burdening the industry with unnecessary limitations which ultimately tend to lower its overall efficiency, in addition to being reactive and short in preventing the successive devastating financial crises. Through a brief overview of the evolution of Banking regulations, the role of this session is to explore the new challenges of the risk management profession in line with the ever changing regulatory environment and its impact on the banking industry, and by extension, the overall economy.

1. Banking Regulation and Risk Management
Jad Doumith, CFA, FRM
28/05/2015

2. Session Outline
•Is Banking Regulation a necessity?
•Globalization, Complexity and Regulations
•Reactivity Vs Proactivity
•The Basel Accord: Evolution and pitfalls
•Learning by Mistake
•Post 2008 crisis: A regulatory Boom
•The Risk Management profession after the crisis
•Already Basel IV?
•Financial Crises: Black Swans or predictable events?
•Q&A Session

3. Is Banking Regulation a necessity?
• Reducing systemic risk.
• Ensuring adequate capital in light of banks’ business
model.
• Ensuring adequate liquidity.
• Managing risks…
• BUT ALSO:
• The need for deposit insurance schemes,
• and the natural moral hazard issue that results!
• Too big to fail: moral hazard again!

4. Decentralized Regulation
•Pitfalls of decentralized regulation.
•The need for centralized banking regulation.
•Globalization and complexity of financial transactions.
•The BIS and the Basel Committee : The great
depression and the breakdown of Bretton Woods.
•The 1988 Basel Accord.

5. Banking Regulation – A history of responding to financial crises
•Since inception, global authorities were established to
respond to newly emerging risks.
•The Basel I Accord and Credit Risk.
•Flaws in Credit Risk capital requirements.
•January 1995: Barings Bank
•The 1996 Amendment to Basel to incorporate Market
Risk.

6. Basel II
•Proposed in 2004 to be implemented in 2007.
•Major changes.
•The financial crisis of 2008.
•Ex-post analysis: A tremendous failure of global
regulations.
•Once again, new regulations established to respond
to newly emerging risks or things that went wrong.

7. Regulation Post-Crisis
•Basel III: A regulatory Boom!
•Strengthening capital requirements.
•First time ever Introduction of standardized regulatory
liquidity ratios. Yes there wasn’t any prior to the 2008
crisis!
•Stressed VAR
• CVA
• Capital requirements on funds
• High frequency trading, dark pools, CDO’s,
securitization…

8. Regulation Post-Crisis
•Already Basel IV!!!
•Changes to the market, credit and operational capital
requirement framework.
•More risk sensitive approaches.
•Is it enough? Will we look back few years from now to
say we cannot believe the regulatory framework
omitted this or neglected that?
•Role of the Risk Management Profession.

9. Financial Crises: Black Swans?
•History suggests otherwise!
•Frequency of financial crises and the human memory.
•March 2007: “ At this Juncture, however, the impact on the
broader economy and financial markets of the problems in
the subprime market seems likely to be contained” – Ben
Bernanke
•Summer 2007: “I don’t think it poses any threat to the
overall economy” – Henry Paulson
•The White Swan!

10. Some of the Banking crises in History
•The 1630s Tulip Mania.
•The 1825 Crisis.
•The Panic of 1857.
•Crisis of 1873.
•Panics of 1819, 1838, 1866, 1893 and much more!!!
•Crisis of 1907.
•The Great Depression of 1929.
•The lost decade in Japan.
•Russia in 1998
•LTCM.
•2008…

11. Thank You!