Financial regulations, risk management and value creation in financial institutions: evidence from Europe and USA

5.4 Recommendations

In spite of the fact that there has been a number of studies conducted on financial regulations, risk management and value creation on how investors behave towards making investment decisions, there is no existing research on how these factors combined with risks and return can influence the investment decision-making process. It is hoped that this research will help create this awareness. Some of the recommendations arrived at as a result of this study include the following:

1. This study suggests that financial regulations should work within the scope of their aims and objectives of licensing and supervising providers of financial services at all times, protecting clients, promoting financial stability and maintaining confidence within the financial system. This is because with these put in place, these financial regulations will be able to eliminate the shadow banking operations. As such, this will go a long way in rebuilding the confidence and trust lost in financial institutions as a result of the outbreak of the global crisis as well as preventing the recurrence of another crisis in the nearest future.

2. It is evident that one of the causes of the 2007-2009 global financial crises was as a result of poor credit rating by the credit crating agencies. It is evident that this credit rating industry/market is still highly oligopolistic since it is dominated by just three main credit rating agencies namely: Standard and Poor's, Fitch and Moody's. This implies this industry is suffering from lack of tight competitions and incentives. I think it is time for more credit rating agencies to come into the business scene so that the methodologies can be scrutinized as well as giving room for some tight competition within the industry. Also, it is proposed that these credit rating agencies be registered. These registered agencies will need to appoint at least three independent directors and

these directors should be able to disclose the methodologies used in producing these ratings including the rating criteria.

3. It is also recommended that some changes be made to the Basel framework thereby making capital requirements more counter-cyclical and forcing banks to reserve larger amounts of capital in good times. This is because should this be implemented, it will go a long way to undoubtedly improve the Basel framework and help to reduce financial institutions' leverage which according to IMF was one of the major causes of the 2007-2009 global financial crises. However, this can only be effective only if the current business model in the financial industry is altered because just a higher capital ratio is not strong enough to prevent the re-occurrence of the crisis.

4. Value creation is the primary objective of any business entity as such; most successful businesses understand that the purpose of any business is that of value creation for its customers. In order for this to be achieved, it is recommended that the right employees are employed, trained, developed and rewarded.

5. It also recommended that any successful risk management process must be able to identify the risks types, the risk management strategies to be used, evaluate the risks, define a framework and then implement the strategies.

6. Because risk management is an integral part of any institution's business plan, it therefore implies any decisions leaving or entering an already existing business activity must require a careful assessment of risks. As such, it is suggested that financial institutions should improve their internal systems devoted to risk evaluation, pricing and control

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Appendix 1:

ISDA Market Survey
Notional amounts outstanding, semiannual data, all surveyed contracts, 1987-present
Notional amounts in billions of US dollars, adjusted for double-counting
	Interest rate swaps		Cross-currency swaps				Interest rate options				Total IR and currency				Credit default swaps	Equity derivativ es
	Activity	Outstandi ng	Activity		Outstandi ng		Activity		Outstandi ng		Activity		Outstand- ing		Outstand- ing	Outstand- ing
1H87	$ 181.50		$ 43.50								$ 225.00
2H87	206.30	682.80	42.30		182.80						248.60		865.60
1H88	250.50		60.30								310.80
2H88	317.60	1,010.20	62.30		316.80				327.30		379.90		1,654.30
1H89	389.20		77.60				186.80				653.60
2H89	444.40	1,502.60	92.00		434.80		148.70		537.30		685.10		2,474.70
1H90	561.50		94.60				138.00				794.10
2H90	702.80	2,311.50	118.10		577.50		154.30		561.30		975.20		3,450.30
1H91	762.10		161.30				198.80				1,122.20
2H91	859.70	3,065.10	167.10		807.20		183.90		577.20		1,210.70		4,449.50
1H92	1,318.30		156.10				293.60				1,768.00
2H92	1,504.30	3,850.80	145.80		860.40		298.80		634.50		1,948.90		5,345.70
1H93	1,938.40		156.80				509.70				2,604.90
2H93	2,166.20	6,177.30	138.40		899.60		607.30		1,397.60		2,911.90		8,474.50
1H94	3,182.90		181.00				850.20				4,214.10
2H94	3,058.00	8,815.60	198.30		914.80		663.00		1,572.80		3,919.30		11,303.20
1H95	3,428.90	10,817.00	153.80		1,039.70		675.80		2,066.20		4,258.50		13,922.90
2H95	5,269.90	12,810.70	301.30		1,197.40		1,339.60		3,704.50		6,910.80		17,712.60
1H96	6,520.30	15,584.20	374.00		1,294.70		1,415.70		4,190.10		8,310.00		21,068.90
2H96	7,157.90	19,170.90	385.10		1,559.60		1,921.50		4,722.60		9,464.50		25,453.10
1H97	10,792.20	22,115.40	463.10		1,584.80		2,566.60		5,033.10		13,821.90		28,733.30
2H97	6,274.90	22,291.30	672.30			1,823.60	1,411.80		4,920.10		8,359.00		29,035.00
1H98													36,974.00
2H98													50,997.00
1H99													52,710.50
2H99													58,265.00
1H00													60,366.00
2H00													63,009.00
1H01	631.50												57,305.00		631.50
2H01	918.87												69,207.30		918.87
1H02	1,563.48												82,737.03		1,563.48	2,312.13
2H02	2,191.57												101,318.49		2,191.57	2,455.29
1H03	2,687.91												123,899.63		2,687.91	2,784.25
2H03	3,779.40												142,306.92		3,779.40	3,444.08
1H04	5,441.86												164,491.72		5,441.86	3,778.15
2H04	8,422.26												183,583.27		8,422.26	4,151.29
1H05	12,429.88												201,413.54		12,429.88	4,825.98
2H05	17,096.14												213,194.58		17,096.14	5,553.97
1H06	26,005.72												250,829.99		26,005.72	6,383.03
2H06	34,422.80												285,728.14		34,422.80	7,178.48
1H07	45,464.50												347,093.64		45,464.50	10,012.90
2H07	62,173.20												382,302.71		62,173.20	9,995.71
1H08	54,611.82												464,694.95		54,611.82	11,888.13
2H08	38,563.82												403,072.81		38,563.82	8,733.03
1H09	31,223.10												414,089.08		31,223.10	8,788.36
2H09	30,428.11												426,749.60		30,428.11	6,771.58