The financial crisis and its impact on risk management

Abstract

Through this study the researcher identified how regulations implemented following the financial crisis, have influenced banking operations. In response to the dotcom bubble, the Federal Reserve decreased interest rates to boost the economy. This led to the increase in house prices. As a result of the banking industries laxed lending standards, many subprime borrowers were able to borrower funds from the bank. The financial crisis was caused by the subprime mortgage crisis, which itself was caused by using unregulated derivatives. As a result, the financial crisis has played a major role in the development and improvement of the banking regulations. Without a doubt such events have greatly affected operations of banks including increase in costs to keep up with regulations. Consequently, risk management was also given greater importance. Moreover, the financial crisis taught many financial institutions that regardless of the size of the institution, when there is a crisis, most banks will feel the adverse effects due to interconnectedness on the market. The MFSA and the EBA together with FSRB aim to monitor and supervise banks on a macro- and micro-economical level. The regulations introduced to mitigate financial distress have greatly influenced several banking services including lending, deposits, investments, and other services. This dissertation aims to answer three important research question. Firstly, it aims to uncover how the Maltese banking system was impacted by the crisis. In addition, this study aims to answer how core and non-core banks were affected by the regulatory reform. Lastly, this study aims to identify whether the regulations being implemented are too stringent and identify whether these can help to mitigate the financial system from another crisis. To gather a deeper understanding on one of the most influential periods in the financial markets a qualitative approach was used. The researcher used semi-structured interviews and desk research. Banks of different sizes in Malta were the targets of these interviews. Throughout this research study it was found that both significant and non-significant banks were merely impacted by the financial crisis mostly because Maltese banks were very prudent. Nonetheless, regulatory reform impacted the profits and activities of banks regardless of the size of the bank. It is also important to note that the banks interviewed claimed that with the required capital and liquidity standards together with other requirements they managed to overcome the impacts of Covid-19. The purpose of this research study is to better identify how the increase of regulation due to the financial crisis affected Maltese banks and uncover the perception of banks on such regulations. Hence, these questions may provide valuable insights to regulators as well. Financial institutions had to adapt to the changes brought about by the crisis. Finally, this study will also aim to identify whether the banking industry believes that the increase in regulations aids in the mitigation of a future crisis.