Risk management and regulation of financial institutions

How can regulation help prevent another financial crisis? To find the answer, Professor David Webb and the AXA Research Programme team at the London School of Economics and Political Science are examining weaknesses in the current financial structure and ways to achieve greater stability through governance and regulation and improvements in the conduct of micro and macro prudential policy.
“The current financial crisis has revealed a distance between our understanding of the interconnected behavior of banks, the structure of the banking systems and layers of regulation. Liquidity, funding and solvency are tied together, and that the health of banks and the financial system is codetermined. It emphasised the importance of financial stability and the need for prompt corrective action,” Webb says. “We hope that the findings of this research project will contribute to the development of more informed policy.”
Programme researchers are evaluating the performance of the global regulatory framework during the recent financial meltdown to identify adjustments that could decrease the risk of future crises. The work has shed new light on the importance of the independence of bank boards, the role of risk committees and risk officers in controlling risk and the impact of executive compensation on bank performance. Weaknesses in an undercapitalised banking system and funding and liquidity risks inherent in the shadow banking system have been investigated. Policy work has focussed on a critique of the Basel Capital Accords and on better resolution mechanisms for prompt corrective action and the role of Central Banks. The latter issues have been pursued through a series of high profile workshops and mini-conferences.