By Simon Miller

Risk in the banking system could be managed better through stricter supervision of banks rather simply adopting new laws and policies according to a study from Cass Business School and the University of Piraeus.

The study found that where financial regulators conducted regular audits and imposed disciplinary sanctions banks ran lesser risks than in those countries where public sanctions were less common.

In addition, the study discovered that simply passing laws requiring behaviour failed to curb rosks unless it was combined with effective audits and enforcement action.

Co-author of the study, Dr Manthos Delis from Cass Business School, said the study holds important lessons for regulators seeking to prevent the next financial crisis.

“Our findings suggest that regulators should place more emphasis on auditing, and where needed, sanctioning banks for faulty behaviour, than on formal rules and regulations,” he said. “If anything, the new regulatory umbrella should be more focussed, not on further raising capital requirements, but on enhancing the transparency in the banking system.”

The report also found that that capital regulation, either directly or through its effective supervision, did not curtail bank risk, except at those banks that held a level of capital very close to the minimum.

“A credible threat of supervisory intervention appears to be the underlying driving force behind the disciplinary effect of capital requirements, and not the levels of capital itself,” explained Delis.

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