Lecture 8

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Please note:
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TR
E APTLHACCLEY DOEF BUUSSEIFNUELS S
International Financial
Markets and Banking
L ESACRHNOI N
OGL
Juliane Thamm
SW 3.07, Ext.: 3889, juliane.thamm@strath.ac.uk

Office hours: see myplace for details and/or email for an appointment
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S T R AT H C LY D E B U S I N E S S S C H O O L
Lecture 8
Financial Regulation
© Juliane Thamm – University of Strathclyde

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The financial system in the UK is heavily regulated
Regulations apply to:

Financial markets, such as the equity and bond markets
Financial institutions, such as banks and insurance companies
Selling financial products to investors
responsibilities for financial regulation established in Financial Services Act 2012 and further
specified in Bank of England and Financial Services Act 2016
there are also some international regulations that apply

In the US the Securities and Exchange Commission performs a similar role and most other
countries have their equivalents.
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UK regulation – a selection See also: http://www.legislation.gov.uk/
Bank of England Act 1998

established independence of BoE and Monetary Policy Committee to set base rate of interest
Banking (Special Provisions) Act 2008

enables the UK government to nationalise high-street banks under emergency circumstances (motivated by Northern Rock situation)
Banking Act 2009
Financial Services Act 2012
Financial Services (Banking Reform) Act 2013

includes: Ring-fencing, Depositor preference and the Financial Services Compensation Scheme, Bail-in stabilisation option, Conduct of persons working in
financial services sector, Regulation of payment systems, and Special administration for operators of certain infrastructure systems
Bank of England and Financial Services Act 2016

ends BoE subsidiary of the Prudential Regulation Authority (PRA) by bringing in micro-prudential regulation of financial institutions into the scope of the Bank
of England through the establishment of a new Prudential Regulation Committee; amends the senior managers and certification regime (SM&CR), including
the extension of the SM&CR to all firms authorised under the Financial Services and Markets Act 2000 (FSMA)
Capital Requirements Directive IV (CRD IV)

EU prudential rules for banks, building societies and investment firms; intended to implement the Basel III agreement in the EU
Markets in Financial Instruments Directive 2 (MiFID II)

EU legislation that regulates firms who provide services to clients linked to ‘financial instruments’, and the venues where those instruments are traded
(effective from 3rd Jan 2018); includes a revised MiFID and a new Markets in Financial Instruments Regulation (MiFIR)
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In the UK the Financial Services Act 2012 provides the framework in which all forms
of financial services business, including insurance companies, Lloyd’s, banks, building
societies, friendly and mutual societies, credit unions, investment and pension
advisers, stockbrokers, investment services firms, fund managers, derivatives traders,
and so on, are authorised and regulated
The Act was created in response to the financial crisis and amends the Bank of
England Act 1998, the Financial Services and Markets Act 2000 and the Banking Act
2009. Additional legislation to further address necessary changes to regulation
became law in December 2013: Financial Services (Banking Reform) Act 2013. A
further review resulted in the Bank of England and Financial Services Act 2016
which became law in May 2016. (http://www.legislation.gov.uk/ukpga/2013/33/contents/enacted /
https://www.gov.uk/government/news/bank-of-england-and-financial-services-bill-given-royal-assent )

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On December 31, 2020, the Brexit transition period came to an end and, with
it, the effect of EU legislation in the U.K. The U.K. government must now
consider the extent to which the U.K. should diverge from the EU’s financial
services regulation.
The Financial Services Act 2021 (FS Act) received Royal Assent on April 29,
2021, setting the parameters for the U.K.’s future financial services regulatory
regime. Some provisions came into force on that date, with a limited number
following on June 29, 2021. The majority of the FS Act will come into force on
a date specified in regulations yet to be made by HM Treasury.
https://www.legislation.gov.uk/ukpga/2021/22/contents/enacted
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Selected key aspects of the Financial Services Act 2021:
the FCA has been mandated to conduct a consultation on whether it should make rules specifying
that authorised persons owe a duty of care to consumers - this consultation must be concluded
before January 1, 2022 and any resulting rules made before August 1, 2022
HM Treasury will continue to set financial services policy but will enhance the regulators’ responsibility
for creating rules to implement policy
Introduction of the U.K. Investment Firms Prudential Regime (U.K. IFPR), governing investment
firms that are prudentially regulated by the FCA (it mirrors the EU’s Investment Firms Regulation and
Investment Firms Directive that took effect in June 2021)
implementation of those aspects of Basel III that were introduced into the EU Capital Requirements
Regulation but that did not apply across the EU until after the end of the U.K. transition period, and
consequently have not yet been implemented in the U.K.

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Selected key aspects of the Financial Services Act 2021:
implementation of Basel 3.1, which sets out a series of further reforms intended to restore credibility
in the calculation of risk-weighted assets and improve the comparability of banks’ capital ratios that
have not yet been implemented by either the EU or the U.K.
certain clarifications and amendments to the U.K. Market Abuse Regulation (U.K. MAR), e.g.
increasing the maximum prison sentence for market abuse to 10 years (up from the current limit of
seven years)
changes to the Proceeds of Crime Act 2002 (POCA) and the Anti-terrorism, Crime and Security
Act 2001 (ACSA), extending aspects of that legislation to electronic money institutions (EMIs) and
payment institutions (PIs)
proposed amendments to the U.K. European Market Infrastructure Regulation, including to require
firms to offer clearing services on FRANDT terms* and requiring trade repositories to establish
procedures to improve data quality and ensure orderly transfer of data between repositories
*FRANDT = fair, reasonable, non-discriminatory and transparent commercial terms

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UK regulatory system
Bank of England
protecting and enhancing the stability of the
financial system of the United Kingdom
Financial Conduct Authority
Financial Policy Prudential Regulation
Committee Committee
(FPC) (PRC)
identifying and monitoring prudentially regulating protecting and enhancing confidence

systemic risks banks, insurers in financial services and markets,
and taking action to and complex investment including by protecting consumers
remove or reduce firms; works as the PRA and promoting competition
them

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Bank of England
The Bank is responsible for the supervision of key post-trade financial market infrastructures,
including securities settlement systems, central counterparties, and recognised payment
systems*. Since financial markets rely on continuity of the services that these systems
provide, the supervision of financial market infrastructures links closely with the Bank’s
financial stability objective.
The Financial Services Act 2012 also introduced a new framework for handling crises affecting
the UK's financial stability. Under the framework, the Governor of the BoE must notify the
Chancellor as soon as it becomes clear that a situation has arisen which may lead to a call on
public funds. Following a notification, HM Treasury, the BoE and other relevant authorities,
including the BoE's Special Resolution Unit (SRU), will work together to develop contingency
plans intended to minimise the call on public funds whilst securing financial stability.
* These functions sit alongside the BoE's responsibilities for payment systems oversight introduced by the Banking Act 2009. The BoE refers to clearing
houses, settlement systems and payment systems collectively as financial market infrastructures (FMIs)
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Financial Policy Committee (FPC)

The Financial Services Act 2012 established an independent Financial Policy
Committee (FPC), a new prudential regulator as part of the Bank of England, and
created new responsibilities for the supervision of financial market infrastructure.
The Committee is charged with a primary objective of identifying, monitoring and
taking action to remove or reduce systemic risks with a view to protecting and
enhancing the resilience of the UK financial system.
The FPC has a secondary objective to support the economic policy of the
Government.
The Committee publishes a record of its formal policy meetings and is responsible for
the Bank’s bi-annual Financial Stability Report.
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FCA http://www.fca.org.uk/
supervises the conduct of 26,000 financial firms

responsible for promoting effective competition, ensuring that relevant markets function
well, and for the conduct regulation of all financial services firms, includes acting to prevent
market abuse and ensuring that consumers get a fair deal from financial firms
operates the prudential regulation of those financial services firms not supervised by the
PRA (23,000), such as asset managers and independent financial advisers
The Financial Services Act 2012 also contains provisions allowing for the government to
transfer regulatory responsibility for consumer credit to the FCA, this has occurred in April
2014.

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Payment Systems Regulator (PSR)

an independent subsidiary of the Financial Conduct Authority

created under the Financial Services (Banking Reform) Act 2013 and fully operational
since 1 April 2015.
independent, with its own managing director and board; funded by the industry;
accountable to Parliament
has regulatory powers in relation to payment systems designated by HM Treasury,
which keeps this list under review:
Bacs, CHAPS, Cheque & Credit, FPS, LINK, Mastercard, Visa Europe (Visa), Sterling
Fnality Payment System
More information at: https://www.psr.org.uk/

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Which regulator regulates which firm?

The following firms are PRA-authorised firms, and consequently are dual-regulated by
the PRA for prudential purposes and the FCA for conduct purposes:
Banks
Building societies
Credit unions
Insurers (including friendly societies)
Lloyd's of London and Lloyd's managing agents
Certain systemically important investment firms that have been designated by
the PRA.
The FCA is the prudential and conduct regulator for all other firms that were previously
regulated by the FSA (that is, FCA-authorised firms or FCA-only firms).
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The FCA is the prudential

regulator for firms not
supervised by the PRA and
conduct regulator for all firms.

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UK Financial Services Future Regulatory

Framework Review
Phase I of the Review began in July 2019 and the government’s response was
published in March 2020. It prompted the establishment of the Financial Services
Regulatory Initiatives Forum (consisting of the Bank of England (BoE), U.K.
Prudential Regulation Authority (PRA), FCA, Payment Systems Regulator (PSR) and
Competition and Markets Authority). It also led to the creation of the Regulatory
Initiatives Grid (the Grid), which sets out the financial services regulatory pipeline.
A consultation on Phase II of the Review was launched in October 2020. Phase II

seeks to establish a blueprint for financial services regulation, ensuring a clear division
of responsibilities between government, Parliament and the regulators, providing for
appropriate policy input by democratic institutions and allowing regulation to adapt to
changing conditions.
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Regulatory
Initiatives
Grid May 2021
Image:
https://www.fca.org.uk/publications/corporate-
documents/regulatory-initiatives-grid

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Further developments
On March 3, 2021, the U.K. government published the report by Lord Hill on the U.K.
Listings Review1. The report assesses how, following Brexit, the existing U.K. listing
regime could be reformed to attract more companies, particularly innovative
technology and life sciences companies, to raise capital in London. The FCA has said
that it is carefully considering Lord Hill’s recommendations and has prioritized its
response to them. (see also lecture 4)
On February 26, 2021, the highly anticipated Independent Strategic Review of U.K.
Fintech2 was published. The recommendations are designed to ensure the U.K.’s
competitiveness, attract investments for individual fintechs and raise the U.K.’s status
as a global hub.
1 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966133/UK_Listing_Review_3_March.pdf
2 https://www.gov.uk/government/publications/the-kalifa-review-of-uk-fintech © Juliane Thamm – University of Strathclyde

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Further developments
On 24 September 2021 Chancellor Rishi Sunak has ordered two immediate

reviews of UK financial regulation related to the collapse of Greensill Capital
as he accepted some recommendations from a report1 by a committee of MPs
into the scandal.
1 https://publications.parliament.uk/pa/cm5802/cmselect/cmtreasy/151/15102.htm

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Financial
Regulation
Capital Financial
Prudential
Market Product
Regulation
Regulation Regulation

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Prudential Regulation
If banks and insurance companies hold insufficient reserves they run the risk of failing,
creating losses for their customers
Examples of failures include BCCI (1991), Barings (1995), and Northern Rock (2007)
Prudential regulation seeks to impose restrictions on banks and other institutions to

reduce the risk of failure
Regulators are particularly concerned with “systemic” risk – because financial

institutions are linked the danger is that one bank failing brings down others
For example, if my customer can’t pay me because he has lost his money with ABC
Bank, I may be unable to pay my loan to XYZ Bank, causing problems there... (domino
effect / contagion)
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Risks in Banking
Liquidity risk – that with liabilities payable on demand (deposits) and assets that
mature in time (loans) the bank can face difficulties if depositors demand repayment
Market Risk – the assets the bank has invested in, e.g. bonds, may fall in value
Default risk – the parties to which the bank has lent money may be unable or
unwilling to repay the loans
Operational risk – the bank may lose money by making mistakes in its operations.
Fraud would be an example.

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Why regulate?
In many sectors of the economy outside finance there are no ‘prudential regulations’
Businesses choose how to capitalise themselves and if they get it wrong they become
bankrupt and their shareholders, and possibly their customers, lose
Why is banking different such that we impose capital regulation?

Systemic risks?
Uninformed customers?
Greater chance of customer, rather than shareholder, loss?
We have to remember that regulation imposes costs on the financial system, that in
the end will be borne by customers
Proponents of ‘free banking’ argue the market can be left to operate unregulated.
Customers can choose who to bank with.
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Capital Adequacy
Banks diversify loans in order to reduce the risk of losses from default, but still face the
possibility of unexpected losses
When these occur, they must be met from the bank’s (shareholders’) capital. If there is
not enough capital, the bank will fail
Regulators often seek to set a minimum level of capital that a bank must hold, given
the assets and liabilities it has on its balance sheet
The Basel Capital Accord (1988), aka Basel I, sets out an international agreement on
how to calculate capital adequacy for banks

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Basics of Capital Resources and Requirements under Basel

Capital Resources
> Regulatory Capital Requirement
Balance sheet
Balance sheet
Risk Weighted Off-Balance
Assets sheet
Exposure
Common equity
Tier 1
Perpetual preferred Operational
risk Financial
instruments
LESS
deductions Regulatory
Capital
Resources
Long dated sub debt
Other preferred
Tier 2
> Capital
requirement
8% * RWA Market
risk
Receivables
Securities
Borrowed
Credit
Corporate
Short dated sub debt risk loans
Tier 3
Interim Trading P&L
Derivatives
Cash

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Problems with Basel I

There are a number of important flaws in the first Basel Accord
It assumes that all the assets are independent, but we know the risks are likely to be correlated
(pos. or neg.) across assets
The risk weightings are quite crude:
Is lending to Shell as risky as lending to me? You?
The weights take no account of credit ratings
In November 2005 a new accord “Basel II” has been produced that attempts to improve the
capital adequacy regime - Basel II replaces the current EU regime by way of the Capital
Requirements Directive and member states’ domestic measures
The FSA published its new regulatory capital rulebook in October 2006, implementing Basel II in
the UK.
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Basel II
There are three pillars in the new accord:

Minimum capital requirements
Supervision
Public disclosure
Banks still have to have Tier 1 capital of 8% of RWA

Risk weightings now reflect credit ratings of the borrowers
Lending to an AAA or AA rated company is weighted 20%
Banks may also use their own assessment of risk as an input to the capital adequacy
calculation
Financial institutions must now also hold capital to cover losses from operational (rather
than credit/market) risk
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Basel III Pillars (see also http://www.bis.org/bcbs/basel3/b3summarytable.pdf )
Basel IIII
I
Pillar 1 Pillar 2 Pillar 3
Enhanced Enhanced Enhanced

Minimum capital Supervisory Market
requirements review discipline
Internal assessment Disclosure of

Minimum Capital
Subject & monitoring of risk information to
Requirements
capital adequacy external parties
• To measure capital • Internal processes for • Disclosure of:

requirements for market, credit assessing capital adequacy -scope of Basel application
and operational risk, firms can - risk profiles and exposure
use a variety of approaches • Supervisors ensure capital assessments
Principles does not fall below minimum - composition of capital
• Advanced approaches are capital requirements - capital adequacy
more risk sensitive & better align
regulatory capital requirements
with economic risk
Basel I ✓  
Basel II ✓ Advanced calculations ✓ ✓
Basel III ✓ Enhancements, additions ✓ Enhanced risk governance ✓ Enhanced disclosures

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Basel III (cont’d)

aims to introduce new standards to promote the build-up of capital buffers that can
be drawn down in periods of stress, strengthen the quality of bank capital and
introduce a leverage ratio as a backstop to Basel II
raise the quality, consistency and transparency of the Tier 1 capital base (predominant form of
Tier 1 capital must be common shares and retained earnings and all components of the capital
base will be fully disclosed; from 2019 banks will have to hold a minimum of 10.5% of core
capital)
introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework
introduce a minimum global standard for funding liquidity that includes a stressed liquidity
coverage ratio requirement, underpinned by a longer-term structural liquidity ratio
introduce a framework for countercyclical capital buffers above the minimum capital requirement
issue recommendations to reduce the systemic risk associated with the resolution of cross-
border banks

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Basel III (cont’d)

Key points phased in from 2013 to 2019 (http://www.bis.org/bcbs/basel3/basel3_phase_in_arrangements.pdf )
Core capital to rise from 2% to 7%, including 2.5% capital conservation buffer
Extra countercyclical buffer between 0% and 2.5%
National regulators can set higher ratios
Leverage ratio to become mandatory by 2018

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Basics of Capital Resources and Requirements under Basel III

Capital Resources
Basel III changes X Balance sheet
> Regulatory Capital Requirement
Balance sheet
Risk Weighted
2 Assets Off-Balance
Additional 2 sheet
deductions 1 Additional Exposure
from buffers
capital Common equity Tier 1 from Operational
Perpetual preferred capital
risk Financial
instruments
LESS
> Regulatory

Capital deductions 8% * RWA Market
Long dated sub debt Receivables
Tier 2 Capital risk
Resources Other preferred requirement
Securities
Borrowed
3
Credit
risk Corporate
Short dated sub debt loans
Interim Trading P&L
Tier 3
Derivatives
Cash
4
Leverage Ratio
5
Liquidity Requirements
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Basel III phase-in arrangements – capital & liquidity

Source: Adapted from Bank for International Settlements, Basel Committee on Banking Supervision, www.bis.org/publ/bcbs189.pdf
Source: Casu, Girardone and Molynex (2006) Table 7.6 & 7.7

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Basel III leverage ratio
The leverage ratio refers to the amount of capital to a bank's non-risk weighted assets,
and was set at a preliminary level of 3% in the aftermath of the 2007-09 financial crisis.
The Group of Central Bank Governors and Heads of Supervision (GHOS) agreed on
10th Jan. 2016 that the permanent level should remain at 3% for the bulk of lenders
across the world, however, it discussed "additional requirements" for the world's
globally systemic banks.
GHOS will finalise the calibration in 2016 to allow sufficient time for the leverage ratio
to be implemented by 1 January 2018.
The United States, Switzerland and Britain already expect their biggest banks to have
a leverage ratio of 4 to 6 percent, well above the current Basel minimum.

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Basel III leverage ratio


Basel III liquidity requirements
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Assessment by the IMF on progress so far: IMF Global Stability Report

2018, Fig. 2.2, p. 61
https://www.imf.org/en/Publications/GFSR/Issues/2018/09/25/Global-
Financial-Stability-Report-October-2018#Chapter%201

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Basel 3.1
seeks to restore credibility in the calculation of risk-weighted assets

(RWAs) and improve the comparability of banks’ capital ratios by:
• enhancing the robustness and risk sensitivity of the standardised approaches for credit
risk, credit valuation adjustment (CVA) risk and operational risk;
• constraining the use of the internal model approaches, by placing limits on certain inputs
used to calculate capital requirements under the internal ratings-based (IRB) approach for
credit risk and by removing the use of the internal model approaches for CVA risk and for
operational risk;
• introducing a leverage ratio buffer to further limit the leverage of global systemically
important banks (G-SIBs); and
• replacing the existing Basel II output floor with a more robust risk-sensitive floor based
on the Committee’s revised Basel III standardised approaches
For details see: https://www.bis.org/bcbs/publ/d424_hlsummary.pdf © Juliane Thamm – University of Strathclyde
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Basel 3.1

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Leverage ratio
Banks must meet a 3% leverage ratio minimum requirement at all times.
In addition, to maintain the relative roles of the risk-weighted and leverage ratio
requirements, banks identified as global systemically-important banks (G-SIBs)
according the G-SIB standard must also meet a leverage ratio buffer requirement.
G-SIBs must meet the leverage ratio buffer with Tier 1 capital.
The leverage ratio buffer will be set at 50% of a G-SIB’s higher-loss absorbency risk-
weighted requirements. For example, a G-SIB subject to a 2% higher-loss absorbency
requirement would be subject to a 1% leverage ratio buffer requirement.
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Basel 3.1
The PRA will have to assess the likely impact of Basel 3.1 on the UK banking
sector and decide how best to calibrate the framework.
The Financial Services Act 2021 does not specify in detail how the PRA should
implement Basel 3.1 in the UK, and instead gives the PRA broad discretion.
The UK government and the PRA have always maintained their commitment to
implementing Basel 3.1 on time, by 1 January 2023.

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Capital Market Regulation

Regulation is also used in an attempt to maintain confidence in the financial markets
Much of this is about trying to ensure transparency and a ‘level playing field’ for all
investors
Examples include:
Requirement that companies disclose material information about their
businesses and adhere to accounting standards
Prohibition of dealing on non-public, “inside”, information
Prohibition of “manipulating” markets
There are regular breaches of all of these rules, but it is probably fair to stay the
standard of conduct in UK markets is generally good

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Financial Product Regulation

It is arguable that many consumers find it difficult to understand financial products
This leaves them vulnerable to being exploited by more sophisticated sellers of

financial products
This gives a motivation for moving from the usual approach of “let the buyer beware”
to a need for regulation
In the UK regulation operates at various levels:

Requiring the sellers of financial products to be “approved”
Requiring the products to have certain characteristics
Requiring certain information to be disclosed to customers
We also have a system of insurance for when things do go wrong – the aim here is to
maintain confidence in the system (e.g. deposit protection; pension protection fund)
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Global regulation
Image:
http://insights.unimelb.edu.au/vol8/img/Vol8images/davis-
fig1.jpg
Basel, FSB, G20 – see next slides

IMF (lecture 9)
IOSCO: International Organisation of Securities Commissions http://www.iosco.org/
IADI: International Association of Deposit Insurers http://www.iadi.org/
IAIS: International Association of Insurance Supervisors http://www.iaisweb.org/

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Bank for International Settlements (BIS)

Established on 17 May 1930, the Bank for International
Settlements (BIS) is the world's oldest international
Image: financial organisation. It has 60 member central banks,
http://www.bibli representing countries that together make up about
otecapleyades.
net/imagenes_s 95% of world GDP, and its head office is in Basel,
ociopol/rothschil Switzerland.
d40_01.jpg
The mission of the BIS is to serve central banks in their

pursuit of monetary and financial stability, to foster
international cooperation in those areas and to act as a
bank for central banks.

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Basel Process
refers to the role of the BIS in hosting and supporting the work of the international
secretariats engaged in standard setting and the pursuit of financial stability.
based on three key features: synergies of co-location; flexibility and openness in the
exchange of information; and support from BIS expertise in the field of
economics, banking and regulation
BIS host for instance the Basel Committee on Banking Supervision (BCBS) who is
responsible for the Basel III framework as well as groups that have their own legal
personality, such as the Financial Stability Board (FSB).
For organisational structure see: http://www.bis.org/about/organigram.pdf

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Basel Committee on Banking

Supervision
The Basel Committee on Banking Supervision provides a forum for regular
cooperation on banking supervisory matters. Its objective is to enhance understanding
of key supervisory issues and improve the quality of banking supervision worldwide.
The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada,
China, European Union, France, Germany, Hong Kong SAR, India, Indonesia, Italy,
Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia,
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and
the United States.
The present Chairman of the Committee is Mr Pablo Hernández de Cos, Governor of
the Banco de España.

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Basel Committee organisation and governance

The governance structure of
the Basel Committee
comprises a chair, standing
groups focused on risk
assessment, supervision,
standard-setting and outreach,
and the Secretariat hosted by
Image: https://www.bis.org/img/bcbs/box-structure-
the BIS. The BCBS reports to
2022.jpg the Group of Central Bank
Governors and Heads of
Supervision (GHOS) - its
oversight body - and seeks its
endorsement for major
decisions.
See:
https://www.bis.org/bcbs/orga
n_and_gov.htm?m=3073

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Financial
Stability Board http://www.financialstabilityboard.org/

(FSB)
The Financial Stability Board (FSB) is an
international body that monitors and makes
recommendations about the global financial
Foto: https://www.fsb.org/wp- system. It was established in April 2009, as
content/uploads/FSB-Plenary-group- the successor to the Financial Stability
portrait-Amsterdam-30-June-2022.jpg Forum (FSF), with a broadened mandate to
promote financial stability. The current chair
of the FSB is Klaas Knot, President of the
De Nederlandsche Bank.

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G20
https://www.g20.org/
Members:
Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy,
Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the
United Kingdom, the United States and the European Union
representing about two-thirds of the world’s population, 85 per cent of global gross
domestic product and over 75 per cent of global trade
the G20’s financial regulatory reform agenda is coordinated by the Financial Stability
Board, which reports to the G20 on its progress in developing and implementing
reforms
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Source: IMF (2022)

https://www.imf.org/en/P
ublications/GFSR/Issues/
2022/10/11/global-
financial-stability-report-
Global Financial Stability Report october-2022
Key Highlights
Images available via a link on the right

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Limitations of Regulation
case for regulation / arguments against regulation

regulation can be justified because of the potential for externalities
regulation cannot correct for market failure because it does not know the objective that it is seeking to
achieve: it does not and cannot know what the outcome of a perfectly competitive market, without
‘market failure’, would have been
regulatory forbearance*
benefits v cost of forbearance
political costs of enforcement

costs of compliance
compliance costs as incremental costs
“[..] the availability of resources is the primary determinant of the types of regulatory strategies
selected by financial regulators.” Pan (2012, p.1)
* Regulatory forbearance is not about supervisory incompetence but, rather, the potential for a fully briefed regulator to decide not to intervene.
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The Case Against Regulation

“There aren’t any problems”
“The problems are small”
“The cost of fixing the problems (regulation) is higher than the cost of the problems”
“The regulation won’t fix the problems”

Because the regulators are not competent
Because people will find a way round the regulations
“The regulation might fix the old problems, but in the process it will create new, more serious
problems”
Regulation is costly, e.g.:
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http://im.ft-static.com/content/images/cc9917d8-8471-11df-9cbb-00144feabdc0.img
Regulation is (too) complex, e.g.:
http://problembanklist.com/wp-content/uploads/2012/04/Financial-Regulation.gif

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next steps
Please review the lecture 8 material and complete the week 8 required
reading, then attempt to answer the workshop 8 questions.
Try self-assessment quiz 8 and check out podcase 4.
Enter your ideas for the Survey home work and complete the
coffee+burger homework!
… and attend the next session!

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further help:
Come to any office hours – these are drop-in sessions, no appointment

needed! All details are on the AG991 myplace page.
Send any questions you may have by e-mail.
If you wish to see me outside of office hours, please e-mail to make

arrangements.

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© Juliane Thamm – University of Strathclyde

The financial system in the UK is heavily regulated

Regulations apply to:

there are also some international regulations that apply

Bank of England Act 1998

Banking (Special Provisions) Act 2008

Banking Act 2009

Financial Services Act 2012

Financial Services (Banking Reform) Act 2013

Bank of England and Financial Services Act 2016

Capital Requirements Directive IV (CRD IV)

Markets in Financial Instruments Directive 2 (MiFID II)

© Juliane Thamm – University of Strathclyde

Selected key aspects of the Financial Services Act 2021:

© Juliane Thamm – University of Strathclyde

Selected key aspects of the Financial Services Act 2021:

*FRANDT = fair, reasonable, non-discriminatory and transparent commercial terms

identifying and monitoring prudentially regulating protecting and enhancing confidence

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Financial Policy Committee (FPC)

supervises the conduct of 26,000 financial firms

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Payment Systems Regulator (PSR)

an independent subsidiary of the Financial Conduct Authority

More information at: https://www.psr.org.uk/

Which regulator regulates which firm?

The FCA is the prudential

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UK Financial Services Future Regulatory

A consultation on Phase II of the Review was launched in October 2020. Phase II

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2 https://www.gov.uk/government/publications/the-kalifa-review-of-uk-fintech © Juliane Thamm – University of Strathclyde

On 24 September 2021 Chancellor Rishi Sunak has ordered two immediate

© Juliane Thamm – University of Strathclyde

© Juliane Thamm – University of Strathclyde

Prudential regulation seeks to impose restrictions on banks and other institutions to

Regulators are particularly concerned with “systemic” risk – because financial

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Why is banking different such that we impose capital regulation?

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Basics of Capital Resources and Requirements under Basel

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Problems with Basel I

There are a number of important flaws in the first Basel Accord

There are three pillars in the new accord:

Banks still have to have Tier 1 capital of 8% of RWA

Pillar 1 Pillar 2 Pillar 3

Enhanced Enhanced Enhanced

Internal assessment Disclosure of

• To measure capital • Internal processes for • Disclosure of:

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Basel III (cont’d)

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Basel III (cont’d)

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Basics of Capital Resources and Requirements under Basel III

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Basel III phase-in arrangements – capital & liquidity

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Basel III leverage ratio

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