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Rise of universal banking and their financial conglomerate structures
The traditional role of commercial banking was the acceptance of deposits for savings and advancement of loans to customers without the bank’s investment of equity in their customers’ firms.66 This traditional role of banks was changed by the rise in universal banking across most of the industrialised countries in the late twentieth centurythat permitted banks to also engage in a range of non-banking businesses.67
However, the factors that motivated universal banking exercised through financial conglomeration, in Europe differed from those in the USA.68 While universal banking69 and the combination of banking and non-bank business had been practiced in Europe since the eighteenth century, the structure of universal banks differed from country to country.70 For example, in Belgium and Germany, universal banking traditionally combined commercial banking and securities trading that enabled them to invest in the companies they lent to.71 Accordingly, the expansion of German and Belgian universal banks was into the provision of insurance services to enhance their competitiveness as globalisation intensified.72In contrast, the French universal banks that originally combined commercial banking and insurance services, sought to expand into securities business.73 In the United Kingdom on the other hand, commercial banks could only underwrite securities through subsidiaries.74
The rise in financial conglomerates in the USA, where nationally chartered banks had been prohibited from underwriting securities since 1933,75 was motivated by increased competition during the 1980s and 1990s,76 from foreign banks77 and the rise of “shadow banking”.78 Since most European foreign banks operated as universal banks in their home markets, the US Congress sought to enhance the competitiveness of US banks by deregulating the financial sector in 1999 through the Financial Services Modernization Act (the Gramm-Leach-Bliley Act) and permitting them to establish financial holding companies that combined commercial banking, with securities, insurance and other related financial services.79 This Act permitted financial holding companies to adopt the financial conglomerates corporate structures that combined a group of two or more companies to “offer at least two distinct forms of financial services.”80 However, the adoption of complex financial conglomerate structures81 that sought to diversify earnings through economies of scale and scope,82 and innovative financial services and products like derivatives,83 posed a significant challenge to supervision.84 This was because the pre-GFC regulatory structures focused more on the safety of individual financial institutions than on the systemic risk emanating from their conduct of business.
Chapter 1: Introduction
1.1 Introduction
1.2 Background to the study
1.2.1 Special role of banks in the economy
1.2.2 The sui generis nature of bank insolvency
1.2.3 The evolution and role of explicit deposit insurance
1.2.4 Moral hazard
1.2.5 The rise and impact of universal banking on moral hazard
1.2.6 The GF
1.2.7 Lessons from the GFC
1.2.8 Post-GFC international response
1.3 Kenyan context
1.3.1 Background to EDIS in Kenya
1.3.2 Currency board era with no deposit protection 1895 to 1966
1.3.3 Implicit deposit protection from 1966 to 1985
1.3.4 Explicit deposit insurance from 1985 to 2012
1.4 Research statement
1.4.1 Hypothesis
1.4.2 Research questions
1.4.3 Limitation of the scope of the study
1.5 Motivation for the study
1.6 Research methodology and selection of comparative jurisdictions
1.7 Summary and lay-out of chapters
Chapter 2: The international context of bank regulation, deposit insurance and
orderly bank resolution
2.1 Introduction
2.1.1 General overview
2.1.2 Chapter overview
2.2 The post-GFC reform of the internaional financial architecture
2.2.1 Group of Twenty countries
2.2.2 Post-GFC reforms to international financial regulation
2.2.3 The Basel Core principles and Joint Forum Principles for supervision of financial conglomerates
2.3 The IADI Core principles of effective deposit insurance systems
2.3.1 Overview of post GFC prominence of EDIS
2.3.2 The IADI Core principles
2.3.3 Addressing moral hazard through the IADI Core principles
2.4 The FSB Key attributes of effective resolution regimes for financia Institutions
2.4.1 The FSB Key attributes
2.5 Implementation of international financial standards
2.5.1 Overview of local adaptation of international financial standards
2.5.2 Prospects and challenges in the implementation of international financial standards
2.6 Chapter summary and conclusions
Chapter 3: The regulation and supervision of financial conglomerates in Kenya, South Africa and the United States of America
3.1 Introduction
3.2 Regulation of financial conglomerates in Kenya
3.2.1 General background
3.2.2 Historical context of bank regulation in Kenya
3.2.3 Central banking and bank regulation in Kenya
3.2.4 Transition to universal banking in Kenya
3.2.5 Implementation of international financial standards in Kenya
3.2.6 Factors influencing the implementation of financial reforms in Kenya
3.3 Regulation of financial conglomerates in South Africa
3.3.1 Historical context of bank regulation in South Africa
3.3.2 South Africa’s regulation of financial conglomerates
3.3.3 Macro-prudential regulation of financial conglomerates
3.3.4 Factors influencing implementation of financial reforms in South Africa
3.4 Regulation of financial conglomerates in the United States of America
3.4.1 Introduction
3.4.2 Supervision of financial conglomerates in the USA
3.4.3 Financial innovations and deregulation of the 1980s
3.4.4 Dodd-Frank Wall Street Reform and Consumer Protection Act
3.4.5 Factors influencing implementation of financial standards in the USA
3.5 Chapter summary and conclusions
Chapter 4: Explicit deposit insurance and special bank resolution in Kenya
4.1 Introduction
4.1.1 General overview
4.2 Kenyan EDIS under DPFB
4.2.1 Mandate and institutional structure of the DPFB
4.3 EDIS under the Kenya Deposit Insurance Act, No 10 of 2012
4.3.1 The Kenya Deposit Insurance Corporation
4.3.2 Public policy objectives, governance and mandate of EDIS
4.3.3 Sources and use of funds
4.3.4 Coverage and payment of insured depositors
4.3.5 Membership of the Deposit Insurance Fund
4.3.6 Legal protection of officers and employees of the dosiinsurer
4.3.7 Cross border cooperation
4.3.8 Relationship with safety-net provider
4.3.9 Participation in contingency planning and crisis management
4.4 Policy framework for bank resolution in Kenya
4.4.1 Introduction
4.4.2 Control of institutions after notification under section 44 of the KDI Act 164
4.5 The Corporation as Resolution Authority (RA)
4.5.1 International standards on resolution powers
4.5.2 The Corporation’s resolution powers
4.6 Factors influencing Kenya’s implementation of international standards
4.7 Chapter summary and conclusions
Chapter 5: Transition to explicit deposit insurance and special bank resolution in South Africa
5.1 Introduction
5.2 Implicit deposit protection in South Africa
5.2.1 Administration of implicit deposit protection in South Africa
5.2.2 Curatorship of distressed banks in South Africa
5.2.3 Investigation of failed banks under section 69A of the Banks Act
5.2.4 The winding up or liquidation of insolvent banks
5.3 Proposed EDIS and SRR
5.3.1 Introduction
5.3.2 The proposed EDIS
5.4 The proposed bank resolution regime
5.4.1 The National Treasury’s resolution policy proposals
5.4.2 Key reforms on bank curatorship and liquidation
5.4.3 Resolution powers under the envisaged SRA
5.5 Addressing moral hazard under the proposed EDIS and envisaged SRR
5.5.1 Evaluation of South Africa’s proposed EDIS and resolution regime
5.5.2 Implementation of the IADI Core principles
5.5.3 Implementation of the FSB Key attributes
5.5.4 Factors influencing South Africa’s implementation of IADI Core principles
5.6 Chapter summary and conclusions
Chapter 6: Explicit deposit insurance and bank resolution in the United States
Chapter 7: Conclusions and recommendations
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