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Financial regulations, risk management and value creation in financial institutions: evidence from Europe and USA


par Agborya-Echi Agbor-Ndakaw
University of Sussex - Master of Science 2010
  

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5.4 Recommendations

In spite of the fact that there has been a number of studies conducted on financial regulations, risk management and value creation on how investors behave towards making investment decisions, there is no existing research on how these factors combined with risks and return can influence the investment decision-making process. It is hoped that this research will help create this awareness. Some of the recommendations arrived at as a result of this study include the following:

1. This study suggests that financial regulations should work within the scope of their aims and objectives of licensing and supervising providers of financial services at all times, protecting clients, promoting financial stability and maintaining confidence within the financial system. This is because with these put in place, these financial regulations will be able to eliminate the shadow banking operations. As such, this will go a long way in rebuilding the confidence and trust lost in financial institutions as a result of the outbreak of the global crisis as well as preventing the recurrence of another crisis in the nearest future.

2. It is evident that one of the causes of the 2007-2009 global financial crises was as a result of poor credit rating by the credit crating agencies. It is evident that this credit rating industry/market is still highly oligopolistic since it is dominated by just three main credit rating agencies namely: Standard and Poor's, Fitch and Moody's. This implies this industry is suffering from lack of tight competitions and incentives. I think it is time for more credit rating agencies to come into the business scene so that the methodologies can be scrutinized as well as giving room for some tight competition within the industry. Also, it is proposed that these credit rating agencies be registered. These registered agencies will need to appoint at least three independent directors and

these directors should be able to disclose the methodologies used in producing these ratings including the rating criteria.

3. It is also recommended that some changes be made to the Basel framework thereby making capital requirements more counter-cyclical and forcing banks to reserve larger amounts of capital in good times. This is because should this be implemented, it will go a long way to undoubtedly improve the Basel framework and help to reduce financial institutions' leverage which according to IMF was one of the major causes of the 2007-2009 global financial crises. However, this can only be effective only if the current business model in the financial industry is altered because just a higher capital ratio is not strong enough to prevent the re-occurrence of the crisis.

4. Value creation is the primary objective of any business entity as such; most successful businesses understand that the purpose of any business is that of value creation for its customers. In order for this to be achieved, it is recommended that the right employees are employed, trained, developed and rewarded.

5. It also recommended that any successful risk management process must be able to identify the risks types, the risk management strategies to be used, evaluate the risks, define a framework and then implement the strategies.

6. Because risk management is an integral part of any institution's business plan, it therefore implies any decisions leaving or entering an already existing business activity must require a careful assessment of risks. As such, it is suggested that financial institutions should improve their internal systems devoted to risk evaluation, pricing and control

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Appendix 1:

ISDA Market Survey

 
 
 
 
 
 
 
 

Notional amounts outstanding, semiannual data, all surveyed contracts, 1987-present

 
 

Notional amounts in billions of US dollars, adjusted for double-counting

 
 
 
 
 

Interest rate swaps

Cross-currency
swaps

Interest rate
options

Total IR and currency

Credit
default
swaps

Equity
derivativ
es

 

Activity

Outstandi
ng

Activity

Outstandi
ng

Activity

Outstandi
ng

Activity

Outstand-
ing

Outstand-
ing

Outstand-
ing

1H87

$
181.50

 

$
43.50

 
 
 

$
225.00

 
 
 

2H87

206.30

682.80

42.30

182.80

 
 

248.60

865.60

 
 

1H88

250.50

 

60.30

 
 
 

310.80

 
 
 

2H88

317.60

1,010.20

62.30

316.80

 

327.30

379.90

1,654.30

 
 

1H89

389.20

 

77.60

 

186.80

 

653.60

 
 
 

2H89

444.40

1,502.60

92.00

434.80

148.70

537.30

685.10

2,474.70

 
 

1H90

561.50

 

94.60

 

138.00

 

794.10

 
 
 

2H90

702.80

2,311.50

118.10

577.50

154.30

561.30

975.20

3,450.30

 
 

1H91

762.10

 

161.30

 

198.80

 

1,122.20

 
 
 

2H91

859.70

3,065.10

167.10

807.20

183.90

577.20

1,210.70

4,449.50

 
 

1H92

1,318.30

 

156.10

 

293.60

 

1,768.00

 
 
 

2H92

1,504.30

3,850.80

145.80

860.40

298.80

634.50

1,948.90

5,345.70

 
 

1H93

1,938.40

 

156.80

 

509.70

 

2,604.90

 
 
 

2H93

2,166.20

6,177.30

138.40

899.60

607.30

1,397.60

2,911.90

8,474.50

 
 

1H94

3,182.90

 

181.00

 

850.20

 

4,214.10

 
 
 

2H94

3,058.00

8,815.60

198.30

914.80

663.00

1,572.80

3,919.30

11,303.20

 
 

1H95

3,428.90

10,817.00

153.80

1,039.70

675.80

2,066.20

4,258.50

13,922.90

 
 

2H95

5,269.90

12,810.70

301.30

1,197.40

1,339.60

3,704.50

6,910.80

17,712.60

 
 

1H96

6,520.30

15,584.20

374.00

1,294.70

1,415.70

4,190.10

8,310.00

21,068.90

 
 

2H96

7,157.90

19,170.90

385.10

1,559.60

1,921.50

4,722.60

9,464.50

25,453.10

 
 

1H97

10,792.20

22,115.40

463.10

1,584.80

2,566.60

5,033.10

13,821.90

28,733.30

 
 

2H97

6,274.90

22,291.30

672.30

1,823.60

1,411.80

4,920.10

8,359.00

29,035.00

 
 

1H98

 
 
 
 
 
 
 

36,974.00

 
 

2H98

 
 
 
 
 
 
 

50,997.00

 
 

1H99

 
 
 
 
 
 
 

52,710.50

 
 

2H99

 
 
 
 
 
 
 

58,265.00

 
 

1H00

 
 
 
 
 
 
 

60,366.00

 
 

2H00

 
 
 
 
 
 
 

63,009.00

 
 

1H01

631.50

 
 
 
 
 
 

57,305.00

631.50

 

2H01

918.87

 
 
 
 
 
 

69,207.30

918.87

 

1H02

1,563.48

 
 
 
 
 
 

82,737.03

1,563.48

2,312.13

2H02

2,191.57

 
 
 
 
 
 

101,318.49

2,191.57

2,455.29

1H03

2,687.91

 
 
 
 
 
 

123,899.63

2,687.91

2,784.25

2H03

3,779.40

 
 
 
 
 
 

142,306.92

3,779.40

3,444.08

1H04

5,441.86

 
 
 
 
 
 

164,491.72

5,441.86

3,778.15

2H04

8,422.26

 
 
 
 
 
 

183,583.27

8,422.26

4,151.29

1H05

12,429.88

 
 
 
 
 
 

201,413.54

12,429.88

4,825.98

2H05

17,096.14

 
 
 
 
 
 

213,194.58

17,096.14

5,553.97

1H06

26,005.72

 
 
 
 
 
 

250,829.99

26,005.72

6,383.03

2H06

34,422.80

 
 
 
 
 
 

285,728.14

34,422.80

7,178.48

1H07

45,464.50

 
 
 
 
 
 

347,093.64

45,464.50

10,012.90

2H07

62,173.20

 
 
 
 
 
 

382,302.71

62,173.20

9,995.71

1H08

54,611.82

 
 
 
 
 
 

464,694.95

54,611.82

11,888.13

2H08

38,563.82

 
 
 
 
 
 

403,072.81

38,563.82

8,733.03

1H09

31,223.10

 
 
 
 
 
 

414,089.08

31,223.10

8,788.36

2H09

30,428.11

 
 
 
 
 
 

426,749.60

30,428.11

6,771.58

 
 
 
 
 
 
 
 
 
 
 

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