Banking and Financial Regulation in Emerging Markets

Citation

Shanthi, S.K., Nangia, V.K., Sircar, S. and Reddy, K.S. (2015), "Banking and Financial Regulation in Emerging Markets", International Journal of Law and Management, Vol. 57 No. 3. https://doi.org/10.1108/IJLMA-02-2015-0008

Banking and Financial Regulation in Emerging Markets

Article Type: Guest editorial From: International Journal of Law and Management, Volume 57, Issue 3

We are honoured to be the guest editors of this special issue of “Banking and Financial Regulation in Emerging Markets”. In light of the economic deregulation and financial policy amendments, there is a great deal of capital-flows and interconnected financial activities between the developed and developing countries. As such, banking operations have become very complex, and some financial institutions through their sheer reach, across geographies and markets, have become “too big to fail”. For example, Valdez (2003, pp. 25-26) suggests that international banking involves a variety of activities such as deposits/loans to countries, but also covers cross-border operations, trade finance, foreign exchange, corresponding banking, international payment services and so on. In view of that, macro prudential norms have become essential and while most central bankers agree on this in principle, the actual practice among different countries exhibits some diversity.

The global financial system has faced several crises like the Asian financial crisis (1997), dot-com bubble (1997-2000) and the recent sub-prime crisis (2007-2009) that have led governments and regulators to take preventive actions in ensuring financial markets' stability (Paulet, 2011; Reddy et al., 2014). In particular, Paulet (2011) suggests that:

[…] regulation is a necessary but not sufficient condition to ensure the efficiency of banking and financial markets; therefore these institutions should be refocused on the collection and distribution of long term lending and retail activities.

Likewise, Mullineux (2006, p. 381) also describes that banks require good regulation that should be aimed at limiting the excessive risk-taking, and attention to conflicts of interest and competition issues, especially given the clear information advantage of banks over their retail customers. Overall, regulatory systems and corporate governance practices must be widespread and well-balanced (Petitjean, 2013). In a recent study, Barth et al. (2013) survey the bank regulatory and supervisory policies in 180 economies during 1999-2011 and infer that “there has not been a convergence in bank regulatory regimes over the past decade despite the worst global financial crisis since the Great Depression”. More importantly, the market for mergers and acquisitions in the banking and financial sector has sharply increased around the crisis, especially in emerging markets (Reddy et al., 2011, 2013).

Conversely, de Mendonça et al. (2012) suggest that the regulation and transparency of the Brazilian financial and banking system could be progressed through an optimal balance between governmental regulation and market discipline. Furthermore, apart from the crisis, a given economy should monitor and control unethical actions, like insider trading, money laundering, white-collar crimes and other undesirable practices. However, emerging countries should realize that simply adopting Western practices in local environment might not produce better economic results due to several institutional issues. For instance, Guo et al. (2013) mention that some corporate governance mechanisms associated with developed countries have no significant impact on firm performance in China because of the strong governmental influence on state-owned enterprises.

With this backdrop, the special issue welcomed scholars to submit their research work on the aforementioned themes. Following the double-blind review system, we have accepted 4 articles out of 22 submissions. We believe that the selected papers published in this special issue constitute a representative sample of what is welcome and we hope readers will enjoy reading them. Thus, papers offer rich insights into the different angles of regulatory practices and are nuanced to specific countries. They will contribute to a better understanding of the various issues and will be of great use to academics for further research and for practitioners in their new policy initiatives in the area of banking reform and regulation.

Saibal Ghosh contributes a paper titled “Credit growth and macro prudential regulation: is ownership important?”. The paper examines the impact of macro prudential policies (MPPs) on credit growth. It uses quarterly data on Indian commercial banks for the period 2002:1 to 2012:1 that subsume the imposition of MPPs. It suggests that MPPs targeted on provisions are relatively more effective in limiting credit expansion. Given the predominantly bank-based nature of the financial system, MPP measures have been focused primarily towards banks, so that the possible contagion from serious disruption is well-contained.

Eva Kan and Mahmood Bagheri contribute a paper entitled “Banking crises and Hong Kong: coordination between regulatory measures and compensation schemes (bailout, deposit insurance and insolvency laws)”. The paper will fill a gap in the literature regarding bank failures, particularly the recent financial crisis affecting financial centres such as Hong Kong. The current literature puts emphasis on one important aspect of the problem by taking into account the overall picture in both legal and non-legal mechanisms. It not only links the ex-ante preventive regulatory measures to the macroeconomic consideration for the prevention of future banking crises, but also identifies a number of ex-post compensation schemes, followed by examination of the level of coordination between them. It argues that unless there is coordination between these two paradigms, financial crises are inevitable. Given the globalised nature of financial markets and the domestic nature of regulatory laws and compensation schemes, it suggests that there is a necessity of more coordination between national authorities to prevent future banking crises.

Kenneth Ajibo contributes a paper titled “Risk-based regulation: the future of Nigerian banking industry”. The paper posits that the future of the Nigerian banking industry lies in a risk-based framework in line with global best practices and international standards in banks. It aims to determine how adopting a risk-based framework as a regulatory governance model can improve the investment landscape in the sub-sector. While drawing attention to the frequent distress and failures in the banking sub-sector, relying solely on recapitalisation strategy and obtaining information from rating agencies to determine the health of banks in Nigeria is highly insignificant. This is more so when the rating institutions are embroiled in accountability deficits and are being regulated in developed economies. It is argued that this risk-based regulatory paradigm, when implemented, will further boost the nation’s investment profile and reposition the continent’s largest economy as the investment destination centre in the sub-Saharan Africa.

Rakesh Arrawatia, Arun Misra and Varun Dawar contribute a paper titled “Bank competition and efficiency: empirical evidence from Indian market”. The relationship between competition and efficiency, though important, has not been explored for the Indian banking system. By offering insights into this relationship, the paper provides a new perspective to the structure – performance relationship. The Lerner index is measured for the period 1996 through 2011, and a data envelopment analysis technique is applied to provide insights into efficiency levels in the banking sector. It shows that over the period, there has been an improvement in competitive levels in the Indian banking sector. Based on Granger causality tests, it suggests that an increase in competitive levels can positively affect efficiency in the banking sector. It also provides regulators and policymakers with new insights into important strategic decision parameters.

Nominated Paper from this Special Issue to the Journal Annual Awards

Title: Credit growth and macroprudential regulation: Is ownership important?

Author: Saibal Ghosh, Reserve Bank of India, Mumbai, India

Nominated Reviewer from this Special Issue to the Journal Annual Awards

Vipul Singh, Assistant Professor, Institute of Management Technology, Nagpur, India

Special Thanks and Acknowledgement

Co-editors – International Journal of Law and Management

Alexandra Dobson, University of Wales, Newport, UK

Professor Chris Gale, GSM London, UK

Publisher – Emerald Group Publishing Limited, Bingley, UK

Thanks to Anonymous Reviewers

Akarsh Arora

Anand

Boopen Seetanah

Christopher P. Buttigieg

Dilip Kumar

Dipasha Sharma

Ijaz Hussain

Imlak Shaikh

Isaac Ofoeda

Jugnu Ansari

Krishna Reddy

Madhvi Sethi

Naveen Kumar

Neema Mori

P.K. Mishra

Pankaj Varshney

Rachita Gulati

Rudra Pradhan

Sanjay Sircar

Saptarshi Ghosh

Saptarshi Ray

Shalu Bansal

Shigufta Hena Uzma

S.K. Shanthi

Srinivasa Reddy

Vijay Joshi

V.K. Nangia

Vipul Singh

S.K. Shanthi, Vinay Kumar Nangia, Sanjoy Sircar and K. Srinivasa Reddy

References

Barth, J.R., Caprio, G., Jr. and Levine, R. (2013), “Bank regulation and supervision in 180 countries from 1999 to 2011”, Journal of Financial Economic Policy, Vol. 5 No. 2, pp. 111-219.

de Mendonça, H.F., Galvão, D.J.C. and Loures, R.F.V. (2012), “Financial regulation and transparency of information: evidence from banking industry”, Journal of Economic Studies, Vol. 39 No. 4, pp. 380-397.

Guo, L., Smallman, C. and Radford, J. (2013), “A critique of corporate governance in China”, International Journal of Law and Management, Vol. 55 No. 4, pp. 257-272.

Mullineux, A. (2006), “The corporate governance of banks”, Journal of Financial Regulation and Compliance, Vol. 14 No. 4, pp. 375-382.

Paulet, E. (2011), “Banking ethics”, Corporate Governance, Vol. 11 No. 3, pp. 293-300.

Petitjean, M. (2013), “Bank failures and regulation: a critical review”, Journal of Financial Regulation and Compliance, Vol. 21 No. 1, pp. 16-38.

Reddy, K.S., Nangia, V.K. and Agarawal, R. (2011), “Review, rewriting and impact of Indian takeover code”, International Journal of Law and Management, Vol. 53 No. 4, pp. 241-251.

Reddy, K.S., Nangia, V.K. and Agrawal, R. (2013), “Indian economic-policy reforms, bank mergers and lawful proposals: the ex-ante and ex-post ‘lookup’”, Journal of Policy Modeling, Vol. 35 No. 4, pp. 601-622.

Reddy, K.S., Nangia, V.K. and Agrawal, R. (2014), “The 2007-2008 global financial crisis, and cross-border mergers and acquisitions: a 26-nation exploratory study”, Global Journal of Emerging Market Economies, Vol. 6 No. 3, pp. 257-281.

Valdez, S. (2003), An Introduction to Global Financial Markets, 4th ed., Palgrave Macmillan, New York, NY.

About the authors

S.K. Shanthi is currently the Chair Professor at Union Bank Centre for Banking Excellence at Great Lakes Institute of Management, Chennai. She has a PhD in economics from the Institute for Financial Management and Research (IFMR, University of Madras affiliation), Chennai. She has more than 20 years of teaching/research experience in the areas of micro, macro and managerial economics, most of it at the IFMR. She has published research reports, papers and newspaper articles in the broad areas of public finance and applied finance, economics and microfinance in national and international publications. She has consulted with the Government of Tamil Nadu, CII-Southern Region and CCI in various projects. She has also been associated as a Guest Editor with International Journal of Commerce and Management, Journal of Strategy and Management and International Studies of Management & Organization.

Vinay Kumar Nangia is currently a Professor of Banking and General Management at the Department of Management Studies, Indian Institute of Technology (IIT), Roorkee. His research interests include public banking, investments, management education, macroeconomics and policymaking. He has over 35 years of managerial experience, including at senior and top levels in India and overseas, in banking, industry and education. He has multi-functional expertise in banking, finance, general management and education. He was honoured with a distinguished Alumni Award from Banaras Hindu University. He is the advisory member on several educational and business schools boards, and has delivered numerous lectures on diverse aspects of banking and financial markets in various seminars, conferences and workshops.

Sanjoy Sircar is currently a Professor of Finance and Director for PGPM at Great Lakes Institute of Management, Chennai. He started his professional career as a Chartered Accountant with PricewaterhouseCoopers in Assurance and Advisory. His course offerings include corporate finance, strategic financial management, options futures and risk management, international corporate finance and financial analytics. He has authored technical notes on portfolio management and risk reduction, capital asset pricing, leverage and cost of equity. He was a faculty in the finance area at the Fox School of Management, Temple University, Philadelphia and Rutgers, State University of New Jersey. He has also been associated as a Guest Editor with International Journal of Commerce and Management, Journal of Strategy and Management and International Studies of Management & Organization.

K. Srinivasa Reddy received his PhD in international management and finance from Department of Management Studies, Indian Institute of Technology (IIT), Roorkee. His research and teaching interests include mergers and acquisitions, corporate finance and international business strategies. His research work appeared in referred international journals and case collections: Journal of Policy Modeling, International Strategic Management Review, International Journal of Law and Management, International Journal of Commerce and Management, Nankai Business Review International, Emerald Emerging Markets Case Studies and Journal of the International Academy for Case Studies. He also presented papers and cases in doctoral colloquiums and conferences. At graduation level, he did Bachelor of Commerce and Company Secretary (Inter). He then obtained an MBA degree from Andhra University-Visakhapatnam, and qualified for the UGC-NET Lectureship. K. Srinivasa Reddy is the corresponding author and can be contacted at: mailto:cssrinivasareddy@live.com