Banks and their regulators facing global challenges - The Sixth Brunel Banking Conference

By Professor E Philip Davis (Department of Economics and Finance)

03 Jul 2024

On 21st June 2024, the Department of Economics and Finance held the Sixth Brunel Banking Conference, entitled " Bank Regulation, Performance and Stability - Facing Global Challenges ". The conference was held in person at Brunel (with scope for livestreaming).

The conference was organised by Professor E Philip Davis, Dr Dilly Karim and Dr Ka Kei Chan, with invaluable assistance from Professor Alper Kara. With contributions from some of the world’s leading authorities on financial crises, bank behaviour, monetary and regulatory policy, this conference provided a critical overview of challenges facing the banking sector, the regulatory response and the impact on bank performance and stability.

This high-level conference (along with its predecessors in 2018, 2019, 2021, 2022 and 2023) underlined the development of Brunel as a centre of research and teaching in banking economics, the latter being reflected in the introduction of the BSc in Banking and Finance to complement the long standing Banking and Finance MSc, both of which are proving highly popular with students. We also have instituted a Brunel Banking Research Group where we undertake research and policy work in fields such as macroprudential policy, bank competition and risk, securitisation and pension fund regulation.

We were honoured to be able to welcome Professor Charles Goodhart of the LSE, who is rightly seen as the Dean of Monetary and Banking Economics. The conference speakers also included senior officials from major central banks, John Fell from the European Central Bank, Fergal McCann from the Central Bank of Ireland and Kjersti-Gro Lindquist of the Norges Bank. The presenters also included a renowned expert in regulation active in the financial services industry, Patricia Jackson; world-leading academics, that is Professor Louis Nguyen of the University of Durham and Professor Klaus Schaeck of Bristol University; besides Brunel Professors of Banking and Finance Alper Kara and E Philip Davis. Sessions were chaired by Chan, Davis, Kara and Karim.

The conference was organised under four headings; Climate risk, bank performance and regulation (Kara and Schaeck); Macroprudential Policy (Fell, Lindquist and McCann), Bank regulation and bank performance (Davis and Jackson) and Incentives structures and regulation (Nguyen and Goodhart). The conference presentations addressed a rich range of topics, including the following:

Effects of climate risk at a country level on spreads for securitised mortgage bonds, and mitigation provided by “responsible banking” (Kara)
Effects of climate stress tests motivated by financial stability concerns on credit supply and environmental behaviour of borrower firms (Schaeck)
Seeking the optimal method for summarising results of a literature as applied to the effects of macroprudential policy on bank risk (Fell)
Assessing and balancing the costs and benefits of macroprudential policies on the mortgage and housing market (McCann)
Investigating the housing purchasing power disadvantage of different borrower based measures at an individual borrower level (Lindquist)
The positive impact of macroprudential policy on banks’ noninterest income and the potential risks that to which changes in noninterest income give rise (Davis)
Whether simple and tough capital requirements are the “answer” to regulatory failings, some adverse consequences of their imposition and some regulatory failures in pursuing a complementary competition objective (Jackson)
The effect on credit supply of “Zombie” laws requiring banks to maintain foreclosed properties (Nguyen)
The potential benefits of shifting towards unlimited liability, or other means of adjusting incentives, for bank executives and large investors (Goodhart)

A number of the papers, as well as the final overview session’s discussion raised further policy questions for banks, bank regulators and central banks as well as fields for further investigation by researchers. These included:

What should be the relative role of banks and securities markets in financing the transition to net zero? If it is banks, who bears the risk if there is implicit government encouragement to finance untried technologies?
What will be the economic, financial and development effects of the epidemic growth of solar power?
The role of institutional investor shareholders in influencing bank behaviour e.g. in respect of climate change, but also the limits to credit supply effects on borrower behaviour.
Should meta-regression approaches seek to assess the “sentiment” of the authors vis a vis the results as well as the results themselves? How to allow for cross-effects?
Given the rise of NBFIs, are macroprudential policies too focused on banks, to their disadvantage? Indeed, has regulation driven lending to NBFIs, making credit supply more volatile? Would an “instrument” basis for macroprudential regulation be a better way to create a level playing field?
How to avoid “politicisation of regulation”, especially as it affects the housing market? Can regulators affect housing supply, and should central banks comment on home ownership policies?
Does commercial property lending continue to be neglected relative to residential lending? How could macroprudential policy best apply to commercial property lending, or should it be left to microprudential regulation?
How suitable is the “bank Z score” for evaluating bank-level risk? Is it better to evaluate impact on its subcomponents (profitability, capital adequacy, profit volatility) separately?
Do systemic risks mainly link to lending in urban as opposed to rural areas?
Is market power in banking encouraged by regulation, with adverse effects on the wider economy, notably credit to SMEs?
The role of national interest in regulation and finance, e.g. American influence on global regulation inter alia due to their concerns about effects on US housing policy.
The future role of China and developing countries in global finance – will the effects of global standards weaken?
Why do issues of moral hazard arising from limited liability seem to be greater for banks than for other corporations? Is “responsible banking” undercut by remuneration incentives?
If limited liability is retained, how to empower supervisors to intervene in endangered institutions – can independence and being in the central bank help? Is there a need to focus research on incentives for policy makers and regulators as well as those for banks?
Will the trend for equity holdings to be in the form of private equity (and away from long term institutional investors) lead to a generalisation of the bank moral hazard problem to the wider economy (as witness UK water companies)?

The final session where we sought to draw overarching themes was particularly lively and constructive. Many of the presenters went away also with helpful comments and suggestions for improving their papers or for future research on their topics. The online delegates were nonetheless content also and many remained online for the whole day, helped by use of a roving microphone so the comments and questions by the delegates could be heard online as well as the speakers.

Links to the conference presentations are provided below – the reader is warmly encouraged to read them attentively!

Session 1: Climate risk, bank performance and regulation

Alper Kara (Professor of Banking and Finance, Brunel University) “Climate Risk, Responsible Banking and Securitization”

Klaus Schaeck (Professor of Banking and Finance, University of Bristol Business School), “Climate Stress Tests, Bank Lending, and the Transition to the Carbon-Neutral Economy”

Session 2: Macroprudential regulation

John Fell (Deputy Director General, Macroprudential Policy, European Central Bank) “In Search of Macroprudential Policy Effectiveness”

Kjersti-Gro Lindquist (Special Adviser, Financial Stability Department, Norges Bank) “Is Homeownership Sacrificed on the Altar of Macroprudential Regulation?”

Fergal McCann (Head of Division, Macro-Financial Division, Central Bank of Ireland) “The Costs and Benefits of Macroprudential Mortgage Policies – Lessons from Implementation in Ireland”

Session 3: Bank regulation and bank behaviour

E Philip Davis (Professor of Banking and Finance, Brunel University) “Banks’ Noninterest Income and Macroprudential Policy”

Patricia Jackson (Non- executive Chairman SMBC Capital Markets, Chair of the Risk Committee, SMBCI and Handelsbank plc) “Regulation, Fallacies and Misconceptions”

Session 4: Incentive structures and regulation