Ethics are far more important than economics in preventing bank crises, according to a report published today by Berlin-based corruption watchdog Transparency International.The study, Transparency and its Impact on Financial Fragility, used data from bank crises around the world over the past 30 years and correlated the probability of a crisis with 10 variables. The five economic variables - inflation, credit ratio, real interest rate, credit growth rate and GDP growth rate - were found to have little effect on the likelihood of a crisis: an extra point of GDP growth reduced the chance of a crisis by between 12% and 26%, but none of the others made a difference of more than 11% per point of increase.
By contrast, the five ethical variables - corruption, favouritism, judicial independence, prevalence of insider trading and effective regulation - all had dramatic effects. Transparency International measures ethical qualities on a seven-point scale, and a single point of increase on any of the five dramatically reduces the chance of a bank crisis - up to 89%, in the case of judicial independence.
The study's author, Saadia Zahidi, a researcher at the Institute of International Studies in Geneva, said: "While crises may erupt in a relatively short period of time, they are usually the result of long-term fundamental problems in a country’s financial institutions."
She added that the results would boost calls for global financial standards, such as those produced by the Bank for International Settlements, and better transparency on a national level.
More on Regulation
Recent Iosco consultation paper aims to better co-ordinate global regulation
Indian regulators to allow overseas firms to access market but speculation ruled out
Market anticipates an impending regulatory mandate for rupee rates clearing
Is the regulator's goal of trying to be everywhere feasible or even desirable?
Sign up for Risk.net email alerts
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
Nominated for two technology awards
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.