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Aviva Chair in Risk and Insurance, Nottingham University Business School, UK
Banks play a central role in the economy. They mobilize the savings of the public, and act as a major source of credit for the development of business and trade. The competitive and efficient operation of financial markets and institutions is important for the efficient allocation of savings and therefore,... read morefor positive outcomes for the real economy. Recent academic research demonstrates that the efficiency of financial intermediation affects economic growth (Levine, 2005). Therefore, in recent years policy makers have attempted to foster competition to achieve higher efficiency in the financial industry. One school of thought argues that financial deregulation can increase the degree of competition in the market, but at the same time it can induce banks managers to undertake imprudent risks (e.g. Keeley, 1990). Hence, regulations for the financial system should take into account the interactions between competition, efficiency, and financial stability.
Financial stability is of particular importance. The recent financial crisis has demonstrated in the worst possible way that problems in the financial sector can bring about a reduction in investments and consumption, increases in unemployment, and disturb the flow of credit to individuals and firms thereby causing an overall economic slowdown. Furthermore, banking crises tend to impose substantial direct costs. Major recapitalization and restructuring of the banking systems, however, could impose a resource cost both on the wider economy and on the banking system in particular (Daniel and Jones, 2007). Thus the performance of banks has been an issue of major interest for various stakeholders such as regulators, customers, investors, and the general public.
A growing number of influential thinkers see the recent crisis as a series of institutional failures in how the banking industry is governed. Previous research has examined in some
depth the structure and regulation of financial services; questions of governance; issues of ethics and financial innovation. These individual subjects are, however, interrelated and can complement one another. As yet they have not been examined together as a total system; nor have alternative approaches to institutional design been founded on a set of alternative ethical principles. This series will examine the recent evolution of the international banking industry and financial markets and will answer significant questions, such as how competition has led to the transformation of banks and the implications of these changes for risk-taking and bank efficiency. The series will also look at interrelated factors, i.e. regulation, governance, innovation and ethics that can influence the efficiency and stability of banks across different institutional environments.