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Regulation Best Practice

Best Practice

Internationally renowned finance leaders, experts and educators distil and summarize the most important aspects of finance best practice. Each Best Practice essay has an Executive Summary for quick reference, outlining the main points. The Making It Happen feature illustrates practical applications, and where relevant authors have provided illustrative case studies and definitions.

  • Bankruptcy Resolution and Investor Protection in Sukuk Markets
    by Kamal Abdelkarim Hassan, Muhamad Kholid
    According to the Kuala Lumpur-based Islamic Financial Services Board, a standards body for the Islamic finance industry, the Islamic finance industry is a roughly US$1 trillion asset that may almost triple to US$2.8 trillion by 2015. Arguably, sukuk is the catalyst that has put the Islamic finance industry on the global capital market map. Despite being the flagship product of the burgeoning Islamic finance industry, the sukuk market has not...
  • Capital Regulation After the Financial Crisis
    by Jens Hagendorff, Francesco Vallascas
    The capital structure of banks differs in important aspects from that of nonfinancial firms. One such aspect is that bank managements need to comply with capital adequacy rules that impose minimum capital requirements. To justify regulatory interference in the capital structure of banks, financial economists point to an important moral hazard problem. The argument goes that, in the absence of regulatory capital requirements, bank shareholders...
  • Classification and Treatment of Leases
    by Roger Lister
    Lease accounting is nearer than ever to its goal of reporting substance rather than form. International regulators and their national counterparts agree that right-to-use rather than legal title should determine the classification and treatment of leases. The choice is essentially between disclosing a lease as a financial instrument on the balance sheet or as an operating lease on the income statement.Financial reporting of leases is addressed...
  • Costs and Benefits of Accounting-Based Regulation in Emerging Capital Markets
    by Wang Jiwei
    One of the most controversial debates in economic policy is: Should governments intervene in or regulate capital markets? Pure free-marketeers believe that the “invisible hand” can correct all market failures. However, advocates of intervention characterize the regulation process as one in which government intervention corrects market failures and maximizes social welfare. In the case of regulating stock issuance after initial public offerings...
  • How Much Independence for Supervisors in Financial Market Regulation?
    by Marc Quintyn
    The concept of independence, and, in particular, political independence is loaded. In a principal–agent relationship, it is associated with (more) power for the agent and a loss of power or grip for the principal. While the notion of an independent central bank is now more or less generally accepted in democratic societies, the broader notion of independent regulatory agencies (IRAs)—agencies that regulate and monitor important parts of social...
  • Identifying the Main Regulatory Challenges for Islamic Finance
    by Bilal Rasul
    Globally, Islamic finance has exhibited its potential through the ever-increasing number of Islamic financial institutions (IFIs). Unofficial estimates figure Islamic financial assets of the IFIs at nearly a trillion dollars. The Islamic financial industry is still growing and is finding its niche in many Muslim as well as non-Muslim countries. The growth is swift, but it is accompanied by regulatory issues and challenges which will need to be...
  • Principles versus Rules in Financial Supervision—Is There One Superior Approach?
    by Marc Quintyn
    The Challenging Nature of Financial SupervisionTwo things can be stated with certainty about financial sector supervision. First, that few professions have changed so dramatically in recent years, in form, approach, scope, and substance. Second, that the task of supervisors, when compared to several other domains of public policy, has become extremely complex, and that no end is in sight with regard to this process. These fundamental changes are...
  • Revising Basel II—But at What Cost?
    by Vishal Vedi
    Pro-cyclicality and Its IssuesThe future regulation of banking is currently a major area of focus for supervisors and policy-makers, in particular, with the G20 recently committing to strengthening how banks are regulated. There seems to be consensus among stakeholders that additional capital, of the right quality, is required in the system. There is also concern that the existing Basel II requirements are too pro-cyclical to continue to act as...
  • Sarbanes–Oxley After Nearly 10 Years
    by Curtis C. Verschoor
    Two massive financial statement frauds were uncovered within months of each other in 2001–02: Enron and WorldCom. They capped a string of similar earlier fraud cases and became the trigger for the US Congress to overwhelmingly pass in July 2002 the most far-reaching legislation affecting public corporations and their independent auditors since the 1930s. Reflecting the diversity of subject matter covered, the Sarbanes–Oxley Act of 2002 (SOX) was...
  • The Effect of SOX on Internal Control, Risk Management, and Corporate Governance Best Practice
    by David A. Doney
    The Sarbanes–Oxley Act of 2002 was passed in the context of a series of high-profile corporate scandals, a brief recession, and the events of 9/11. These factors were cited by President George W. Bush as a threat to investor confidence and the US economy overall. He also declared: “This law says to every dishonest corporate leader: you will be exposed and punished; the era of low standards and false profits is over; no boardroom in America is...
  • Tripping over Prudence—Ideas for a Sensible Fix for Basel II
    by Samuel Sender, Noel Amenc
    One of the great ironies of the present crisis, given the prevailing consensus that it was too much easy, low-cost credit that caused the US housing bubble, and sent investors off in search of higher returns, is the way the crisis has been exacerbated by undue regulatory prudence. For this, Basel II, as it currently stands, must take some of the blame, as must regulators around the world, who have failed so far to take sensible action to...
  • Understanding the Requirements for Preparing IFRS Financial Statements
    by Véronique Weets
    International Financial Reporting Standards (IFRS), drawn up and published by the International Accounting Standards Board (IASB), are rapidly becoming the most globally applied set of accounting standards. Approximately 9,000 public companies in the European Union had transferred to IFRS reporting as of 2005. Russia, China, Canada, Japan, Australia, and many other countries, including those in the Middle East, are adopting IFRS or have plans to...
  • US Financial Regulation: A Hopeless Tangle, or Complexity for a Purpose?
    by Lawrence J. White
    The US system of financial regulation has received heightened scrutiny recently, because of the financial debacle of 2007–2009. No observer can come away from that scrutiny without being overwhelmed by the complexity of financial regulation in the United States. Many are convinced that this system’s complexity is somehow responsible, at least in part, for the debacle; and, in any event, they would argue that the system must be reformed and...
  • Why Organizations Need to be Regulated—Lessons from History
    by Bridget Hutter
    As far back as the Middle Ages, history provides plenty of lessons on the effects of the failure of financial institutions, of consumer ignorance being exploited through the sale of inappropriate securities, pension plans, and mortgages, and of high and opaque charges for financial products and services. Arguably, regulation has become imperative today, given the increasingly transnational nature of financial markets. Another factor is the...

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