Question

M​‌‌‌‌‌‍‍‌‌‌‌‍‍‍‌‌‍‍‌​odern banks have to face several types of risks and failures of risk management have been claimed to be among the key causes of the 2008 financial crisis. It is not only regulators that have placed increased emphasis on risk management in an attempt to foster financial stability, it is also all the more important for bankers to manage their capital more efficiently in order to maximize risk-adjusted returns from their business activities.

In view of the above, critically discuss the impact of the post-2008 crisis regulations on these banks’ risk management

(Note:Credit will be given for effective planning, analytical ability, depth of analysis, awareness of the strengths and limitations of the information produced, logical flow of ideas, relevance to the theme, and well written presentation. It is also required that students demonstrate relevant skills in utilizing the Bloomberg database to undertake research or conduct an exploratory study in the area of banki​‌‌‌‌‌‍‍‌‌‌‌‍‍‍‌‌‍‍‌​ng.)

Answer 1

The Dodd-Frank Wall Street Reform act was one of the most significant reforms post the financial crisis 2008. A lot of studies have shown that the Dodd-Frank act had improved the financial stability signifcantly. Also consumers were better protected by the act than in the era before the financial crisis. This was mostly thanks to the creation of CPFB (Consumer Financial Protection Bureau) which had helped return around 12 billion dollars to 29 million customers by April 2017. One of the reforms was to bring significant transparency into the derivative markets. Derivative markets were one of the major reasons why the world plunged into financial recession and hence bringing transparency to it has brought much needed changes to the system. By adding the volcker rule, speculative and proprietary trading was also put under control.

The world plunged into Financial recession under the Basel II norms. This brought a necessity to upgrade the norms from Basel II norms to Basel III norms. The financial crisis had brought about a major credit crisis and hence as a result of this banks had to maintain more capital in the form of leverage and capital adequacy ratios. The main focus of Basel III norms were to ensure banks were more resisitant to financial crisis, had superior risk management and were more transparent to the public. This essentially prevents transmission of system wide shocks as we during the period of Financial crisis. So higher capital requirements ensured that the bank's risk management measures were much better.