In this episode of the Oxford Law Vox podcast, banking law expert Nikoletta Kleftouri talks to George Miller about banking law issues today.
Together they discuss some of the major legal and policy issues that arose from the financial crisis in 2008, including assessing systemic risk, pricing risk appropriately in order to avoid moral hazard, and whether the notion of “too big to fail” is on the road to extinction. They also discuss the balance between the theoretical and the practical in Nikoletta’s career, and the research and advisory functions she fulfils.
Amongst the many topics Nikoletta covers in her interview concerning regulatory regimes and crisis management, the question of what key aims regulatory regimes set out to achieve is addressed. Alongside common objectives such as protecting financial stability and limiting the use of public funds, Nikoletta particularly highlights the importance of managing the social impact of regulatory regimes.
Below are selected excerpts from their wide-ranging discussion, and you can also listen to and download the full podcast via SoundCloud.
Nikoletta Kleftouri explored a number of ‘forgotten’ problems in the crisis.
“Another key objective is protecting public confidence, so when you create such a regime you want to make sure that people continue to have confidence in the stability of the system … There is always this element that you can’t predict. For example you can see from the Northern Rock case, when there were all these queues forming in front of the bank, you can’t really predict this, or do anything to address this at the time. But by having a clear framework in place you help creditors, depositors and other stakeholders understand that these are the rules of the game. We do have some rules here, and we’re going to abide by those rules during a crisis or during an annihilation bank failure. So it definitely helps boost public confidence when there are clear rules in place … in addition to having clear rules you need to execute some resolutions, so people need to see that you are applying those rules and you are committed.”
Nikoletta also discusses the concept of “too big to fail” institutions, and the impact that this has had since the financial crisis.
“It’s definitely a troublesome concept. So following the 2007-2008 financial crisis we have all these new phrases and acronyms: too big to fail; too big to liquidate; too important to fail; too interconnected to fail; too big to jail … or some Icelandic institutions in 2008 were even considered to be too big to save. The existence of too big to fail institutions has generated a lot of discussion following the crisis … they are seen to create a moral hazard. The concept distorts pricing risk appropriately; it distorts competition because they receive these implicit government guarantees; and it also creates fiscal burdens for governments and ultimately tax payers. There is therefore a consensus among policy makers that ‘too big to fail’ should become a now dated concept.”
The podcast closes with Nikoletta’s final comments on what key issues she is looking at regarding the current and future landscape of banking and financial law.
“I am extremely interested at the moment in the upcoming regulations and rules on ring-fencing. So this is about structural reform, for example in the UK we had the Vickers report in 2011 which suggested that regulators should ring-fence the retail activities of banking groups from the other investment activities. Another key open issue is non-bank resolution, for example resolution of other parts of the financial system such as central counterparties and investment firms, so there is a lot to be done in these areas. As well as, of course, the impact of all these rules that have come into effect following the crisis, so we have a big package of reforms taking place in the European Union and in the UK … and it will be interesting to see the implementation and the effects of all these new regulations.”
To hear the full interview with Nikoletta Kleftouri – and to listen to more podcasts from a range of law experts – check out Oxford Law Vox on SoundCloud.
Featured image credit: Forex by Allan Ajifo. CC-BY-2.0 via Flickr.
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