A critique of post-crisis structural and prudential bank regulation: the UK case

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Abstract

The University of Manchester Ian Crowther Doctor of Philosophy: A critique of structural and prudential post-crisis regulation: the UK case The 2007 financial crisis created a problem regarding the best way to regulate the UK̢۪s banks. The previous regulatory system failed to see the crisis coming and was unsuccessful at anticipating or intervening to prevent what became an expensive state and taxpayer bailout. The nature of pre-crisis self-steering or light touch regulation was bound up in politics and policy, neoclassical economic theory and the mainstream practice of risk management in banks. Mainstream practitioners in these fields were under pressure to re- regulate banking. This doctoral research provides a critique of arguably the two most important regulatory responses post financial crisis: structural and prudential regulation. Specific focus is given to the way banks are organised via the Independent Commission on Banking̢۪s Vickers Report and its concept of hybrid-ring fencing, together with Basel III̢۪s algorithm for managing the way banks have arbitraged capital adequacy and risk weighted assets historically. Finally, a natural experiment is undertaken by way of a case study to assess the politicisation of the Basel III process of de-risk and recapitalise and its impact on Lloyds Banking Group plc. A further critique on how the behaviour of senior bank managers can change during crises is revealed. Through a theoretical reconceptualisation, this novel research pushes against the functional description of bank management behaviour in mainstream financial management textbooks and asks whether a broader definition is warranted. A multidisciplinary framework and approach to research was adopted through literature of politics, financialisation and heterodox economics. This design proved useful in allowing a critical interpretation of the limits of post-crisis regulation to unfold, alongside a broader recognition of the regulatory impact on the stability of UK banks and the financial system. A methodological framework of mixed methods and pragmatism supported a sequential-exploratory research design. This enabled a qualitative and quantitative approach to developing research questions, data collection, data analysis and its interpretation. Different types of data were analysed in developing the critique: primary data from ultra elite semi-structured interviews, and secondary data from a rich database of publicly available documentary sources, such as reports from politics, regulators, academia and industry, together with financial data from bank management presentations, audited accounts, regulatory disclosures and small firm company returns. Research findings expose the limited nature of structural and prudential regulation on UK banks. Revealed is what can be described as a complex politicised management of re-regulation post-crisis through conduits of legal statute, quasi state bodies and intervention, long held and deep seated institutional arrangements that allow meso-corporatism through epistemic community, and regulatory problem solving guided by sympathy towards the status quo of mainstream approaches to economics and scientised risk management. Also uncovered is the way elites in bank management act as bricoleurs and continue to benefit from the disintermediation of post-crisis prudential regulation. Empirical evidence is disclosed that reveals personal enrichment of the manager from a taxpayer owned bank. There is a clear on-going tension and disconnect at the conjunction of crisis event and mainstream response by regulators and regulation, whilst firms and managers react to be compliant but continue acting as bricoleurs in the struggle to gain competitive advantage via arbitrage. Alternatives are required to solve these problems rather than utilising the limited approach of historic frameworks and substituting parts of a broken machine.

Keyword(s)

Banking Post-crisis Prudential bank regulation Mixed Methods Macroprudential Ring-fencing Too-big-too-fail Keynes Minsky Independent Commission on Banking Risk management Basel Capital accretive Management behaviour bricoleur

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