Scholarly article on topic 'Factors of Weaknesses of Supervisory Methods as Components of Systematic Risk. The Impacts of Collapses to Instability of Banking System'

Factors of Weaknesses of Supervisory Methods as Components of Systematic Risk. The Impacts of Collapses to Instability of Banking System Academic research paper on "Economics and business"

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{"Banking System Inbalances" / "Banking crisis" / "Base l II-III" / "Supervision Methods" / "Systematic Risk" / Depositors / Confidence}

Abstract of research paper on Economics and business, author of scientific article — Kipouros Anagnostis, Kipouros Alexios

Abstract In this paper we consider whether the instability and the possible collapse of the Greek Banking System creates a graeat systematic risk and according to this, the possibility to prevent in the future the crisis and collapse.,by the proper use of supervisory methods of Basel I and II and the transformation of the European financial structures and procedures of the euro system. After the latest development about Cyprus banking system Crisis and searching the reasons of this Crisis (of March 2013),before and after the decisions of Euro group (of 15/3/2013) we have to answer about the situation that emerged. The questions was about the reformations needed after the decision of Eurogroup, including the shrinkage of Cyprus banking system, to a more smaller in capitalization and in volume of turnover, of the existed banking system in Cyprus. The Eurogroup insisted, that the size of banking system, is now 8 times bigger than the G.D.P. of the country, asking simultaneously from Cyprus government, to alter the economic model of the country, by reducing the service/banking sector, after the bankruptcy of one at least of the two bigger banks. The big problem emerged, after the declaration of the suspension of the «deposits guarantee» and the fear of the “Bank run” and the following collapses of banks in many states. So we have to examine the right application of rules and procedures for the Banking system. The target is to examine the mistakes and inefficiencies, that brinks the system very near to collapse, through the contagion mechanism, to the rest of Eurozone and mainly to Greek Banking System. After the above, we have to examine and re-examine the methods of Supervision of Banking System procedures (choosing among other) political/country risk and credit risk, in order to increase the credibility and the soundness of Banking System. So we have to analyze here a “Systematic Risk” situation and analyse the Methods referring to the supervisory criteria of Banking System to prevent the negative impacts of the systematic risk, that is possible to lead to an “irregular” bankruptcy.

Academic research paper on topic "Factors of Weaknesses of Supervisory Methods as Components of Systematic Risk. The Impacts of Collapses to Instability of Banking System"

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Procedia Economics and Finance 9 (2014) 120 - 132

The Economies of Balkan and Eastern Europe Countries in the Changed World (EBEEC 2013)

Factors of Weaknesses of Supervisory methods as components of systematic Risk.

The Impacts of collapses to instability of Banking System

1 2 Kipouros Anagnostis Kipouros Alexios *

aAssossiate Professor,Accounting Department, TEI of Kavala, Ag. Loukas, 65404, Kavala, Greece Accounting Department, TEI of Kavala, Ag. Loukas, 65404, Kava\a, Greece

Abstract

© 2014 The Authors. Published by Elsevier B.V.

Selection and peer-review under responsibility of Kavala Institute of Technology, Department of Accountancy, Greece

In this paper wc consider whether thc instability and thc possible collapse of thc Grcck Banking System creates a gracat systematic risk and according to this ,thc possibility to prevent in thc future thc crisis and œllapse.jby thc proper use of supervisory methods of Basel I and II and thc transformation of thc European financial structures and procedures of thc euro system.

After thc latest development about Cyprus banking system Crisis and searching thc reasons of this Crisis (of March 2013) before and after thc decisions of Euro group (of 15/3/2013) wc have to answer about thc situation that emerged.

Thc questions was about thc reformations needed after thc decision of Eurogroup , including thc shrinkage of Cyprus banking system, to a more smaller in capitalization and in volume of turnover, of thc existed banking system in Cyprus.

Thc Eurogroup insisted , that thc size of banking system, is now 8 times bigger than thc G.D.P. of thc country , asking simultaneously from Cyprus government , to alter the economic model of the country, by reducing the service/banking sector, after the bankruptcy of one at least of the two bigger banks .

Thc big problem emerged, after thc declaration of thc suspension of thc «deposits guarantee» and thc fear of the" Bank run " and thc following collapses of banks in many states. So wc have to examine thc right application of rules and procedures for the Banking system. The target is to examine the mistakes and inefficiencies , that brinks the system very near to collapse, through the contagion mechanism, to the rest of Eurozonc and mainly to Grcck Banking System.

* Corresponding author. Tel.: +30-2510-462194; fax: +30-2510-462194. E-mail address: epenktim@otenet.gr

2212-5671 © 2014 The Authors. Published by Elsevier B.V.

Selection and peer-review under responsibility of Kavala Institute of Technology, Department of Accountancy, Greece doi: 10.1016/S2212-5671(14)00013-6

After the above, we have to examine and re-examine the methods of Supervision of Banking System procedures (choosing among other) political/country risk and credit risk, in order to increase the credibility and the soundness of Banking System.

So we have to analyze here a "Systematic Risk" situation and analyse the Methods referring to the supervisory criteria of Banking System to prevent the negative impacts of the systematic risk, that is possible to lead to an "irregular" bankruptcy.

Key words: Banking System Inbalances; Banking crisis; Basel II-III; Supervision Methods; Systematic Risk; Depositors; Confidence.

1.1 ntroduction

.DEVELOPM ENTSAND Q U ESTIO NS ABO UT CYPRUS" BANK I NG SYSTEM CRISIS' AND COLLAPSE

AND THE WAYS TO RESTORE TH E CONFIDENCE OF THE DEPOSITORS

Searching the latest developments about Cyprus banking system Crisis and searching the reasons of this Crisis (of March 2013) ,before and after the decisions of Eurogroup of 15/3/2013, about the reformations which will lead to a shrinkage to a more smaller in volume of turnover of the existed banking system in Cyprus , that is now 8 times bigger than the G.D.P. of the country.

This means : a) to reduce the high capitalization of banking system and to find the amounts for the recapitalization , b) the split the size of banks as firms and c) to reduce the number of banks ,or finally, if it is not possible to achieve all them, to go in bankruptcy every bank, which can not cover their deficits and the capital adequacy.

This events of sharp and forced changes, is most possible to lead to the collapse of the two bigger banks of the country.

After this evolutions, there was a relative concern and the spread of a fear between depositors, even in Germany putting to an uncertainty the Eurozone the same and the future of Euro, as common currency. So after all these evolutions and the psychological environment that created the degree of uncertainty increased for the Cyprus economy and also the possibility of Banking System to collapse.

This catastrophic phenomenon could affect also the Greek Banks, being in the stage of recapitalization, threatens also the stability of Greek banking system and the same the Eurozone. So we have here a typical «systematic Risk situation», which would have negative reactions generally for the Banking System in the countr

Asking simultaneously by Eurogroup decision , to alter the economic model of the country, by reducing the service sector and mainly the Banking System.

This means a need for the proper recapitalization, or the split of the banks as firms ,or the finally the bankruptcy for them.

This event is possible to trigger the collapse of the two bigger banks and after this there is a relative concern for Eurozone and the future of Euro, because this undermine the confidence of the depositors.

After all this evolutions the degree of uncertainty increased for the Cyprus economy and also the possibility of Banking System collapse, by resolving of the two bigger Banks.

This catastrophic phenomenon could affect also the Greek Banks, being in the stage of recapitalization, threatens alsoexcept theGreek Banking System and the stability of Eurozone and.

After these we have a systematic Risk situation which would have negative reactions generally for the Banking System of the country and not only them.

References in the newspaper about this threat of "Systematic Risk", often brings a certain level of panic for Bank run as was discussed in theory and practice

Simultaneously special in Greece we had the problem of the delay of recapitalization of Greek Banks and the joined problem of liquidity problem and capital inflows, to restore economic development.

This fact puts under suspension the safety of deposits and the great concern of depositors about this.

It is well known from economic theory, that all these thinks and events increases the fears that a similar phenomenon (in smaller scale) , after the Lehman Brothers collapse, that was leaded also ,to a fiscal burden of the states and governments to pay the cost for saving the banks, with tax payer money, to avoid other negative consequences for the Banking and Financial System.

After this risk of collapse , the responsible authorities decided to fortify the functions of the Banking system and to declare, that they guaranteed the deposits till 100.000 € per person.

After this declaration and the great concern for the suspension of the deposits guarantee and the fear of Bank run followed by the collapse.

So the main thought was the avoidance of the fear of collapse, through the contagion mechanism to the rest of the Eurozone and mainly to Greek Banking System.( Schoenmaker D.,1993, Internationalization of banking supervision and deposit insurances. Journal of International banking Law, 8.)

2. Reasons and impacts of crisis of Greek Banking System

We have seen, gradually, from the year 2008, after the catastrophic spreading of sub primes of Lehman Brother to all other world financial markets, we are watching a continuous "strike" and the devaluation of the confidence of investors and depositors, outside the borders of USA to other countries of the world.

The collapse of the "structure finance" and securitization, had as impact the discouragement of self-finance through the assets of banks.

The collapse also of the «Interbank market» and the rise of interests rates at 25 -50 b.p. above the Euribor initially.

The difficult way of raising capital and liquidity, through the means of "loans and receivables", by the avoidance of the devaluation of the securities of banks.

Additionally to this point the European Commission made an Intervention to "IFRS committee", to permit the devortion of valuation of bank securities, that in other case could lead to a direct great losses in bank «profit and loss account».»

The "Rating Agencies" in the same time ,degraduated the active role of banks, because of their inability to find long-term loans from the traditional ways.

After this the banks turned to attract capital from the one-way «client depositors» to find new liquidity, but was inadequate to support (banks) Capital adequacy and the proper liquidity.

All these creates the need for "State guarantees" to Banks for loans and finance, but many States was incapable to give this finance, because of the fiscal crisis.

In the Same period ECB, created new procedures to bring short-term liquidity (1 year) and a slack on the criteria for the proper collateral items , accepting low credibility securities as collateral for the additional finance.

This was very great aid to banking system to survive.

After these events the liquidity and profitability of Greek banks was eliminated irreversibly, with negative «contribution Margin» of their products and services.

All the above mentioned were results of the bad architecture and the bad Construction of the Eurozone, because of the non-existence of mechanisms like the Eurobonds, as basic instruments for the debt financing to governments and banks.

And as said the famous Economist (Nobel Laureate) Josef Stieglitz (in an interview), within the Eastern summit of IMF - 2013, «The problems of Greece are jointed and depended from the structural problems of Euro».

Also he focused on the need to support financially the enterprises in the region of Europe, which was "stroked" unavoidable, from the problems that creates from a) the limited banking liquidity, b) from the bad architecture of Eurozone and the weaknesses of Euro.

Because the Eurozone was based in a semi -ready plan, that confront structural problems in the time.

The legal frame of Eurozone by the construction was subtracted the «basic adjustment mechanisms of adaptation» ,as:

a) the interest rate mechanism and

b) «the currency devaluation adjustment mechanism» and

the weakness to replace them, with other mechanism, like the «Eurobond» and the function of «Lender of last resort».

This was a serious Architectonic fault and serious weakness of Eurozone , as a zone of single currency, to restore the equilibrium in financial markets. Phenomenon that made the system of Euro unstable, created easy crisis ,with possibility to become a systematic crisis with the proper risk.

In the case of Greece the exclusion from the International Capital and Money Markets and the inability to make an "Inner devaluation" of the currency, are the main structural reasons for the crisis after 2008-9.

In the deep of debt, there is a twin substantial mechanism for the creation of the great debt and Banking crisis simultaneously, in the form that referred above.

The construction of Eurozone unfortunately has no effective mechanism to reply to this problems of crisis deepening to a depression of the Economy.

3. Methods of Supervision of Banking System procedures

The impacts of Systematic risk

After the above we have to examine the insolvency risk and the methods of Supervision of Banking System procedures ,in order to increase the credibility and the soundness of Banking System.

So we have to analyze here, the impacts of Systematic risk after the creation of Systematic crisis , according the main factors of risk.

Searching more accurately about the special components , that are used on the credit risk methodology, according Basel II and III and the procedure and criteria of supervision, for the soundness of Banking System.

Approaches and methods referring to the supervisory criteria of Banking System to prevent the negative impacts from the systematic risk, that is possible to lead to an "irregular" bankruptcy, of some Banks.

So we have there to examine , the whole regulative system as a matter of the methods used, for the control of the Banks behavior according to regulations, as a set of regulative framework of deontology and behaviour of Banks (Kay-Vikkers, 1988, regulatory reforms in Britain, economic policy October 1988).

We know that the financial system is not enough able to work well , by only the existence of the "Market Mechanism" , to restore equilibrium of prices and factors.

In financial Markets one of the main matters for the "imperfect o asymmetric information" and the particularity of the markets, is the "lack of information" , and the low knowledge of the relevant information or the ignorance by the investors (mainly small investors), about the Market real conditions and here about the Banks credibility.

The institutional framework form the beginning of Basel I to III, put a framework of three main needs:

1) The protection of Investors,

2) the protection of every firm/person that make an exchange with the banks,

3) the protection of the financial/banking system and the need for a common regulatory frame. Because the bankruptcy any (specially the biggest) of them, is possible to lead in the instabilisation of the whole financial system.

So by the definition of systematic risk, it includes the mean of confidence (fidae) of the investors in the market and the (well done) symmetrical function of the system of clearance and settlements. (Davis F.P., (1995), "Debt financial fragility, and systematic risk", London, New York, Clavendon Press)

So Schoenmaker (Schoenmaker, 8, 1993, International Banking Supervision and deposit insurance, Journal of International Banking Law) is referring for the evolution of the importance of destabilization of financial system, though the contagion of the consequences on the bankruptcy of a bank, that technically evaluates the following regression

% Bank Failuret = a + b % Bank Failuret-1+gZ

where Z is the "steady state variable", as a set of macroeconomic variables, which probable affects the frequency of appearance of bankruptcies in banking firms.

And the terms "contagion" is defining from the binding possibility to go bankrupt the Bank J, FOJ, given the Bankruptcy of the firm I. F.O..

Prob (FOJ/ FOi).

Where after the evaluation of the parameter b, being more important and greater in influence (Syriopoulos K, 1999, International Capital Markets Theory and Analysis, Edition Anikoulas).

The empirical evidence of the above , means that after the banks bankruptcy of the last two months, this fact has a significant impact in the bankruptcy of the running month (of the searching period).

Since taking in account the macroeconomic variables Z and the diversifications of the other financial institution, where the possibilities of contagion are more possible.

But others academics like Kaufman (1994), concluded that the concern about the stability of the system is too excessive to be true, after a Bank collapse to the other Banks.

Oppositely , some opinions of academics said that, was better the absence of supervision, even for example after the collapse of Barings Bank and the impact to other banks, seem to be non-sense, and the level for the contagion is very low.

4. The cooperation of supervisory authorities and VaR models

The "risk weights" of the capital requirement of Banks to measure and to prevent the collapses are as follow.

Changes and implications, especially in the market values of loans and securities, due to the new International Capital requirements of the banks (according to risk-weight assets), which sets in motion these changes.

The situation has arisen, not only because of the different risk weights, to compute the new Capital requirements, applying into different kinds of bank's assets, but also from the new more complex procedures, about the "supervisory review" of authorities and the necessity for greater information and disclosure, about banks operational effectiveness and profitability, in order to meet the so called "Market Discipline", in order to be in compliance with the depositors and investors needs, that must be informed about the financial situation, profitability and credibility of balance sheets and other crucial indices and the proper information about the Banks.

So we can say that the cooperation of supervisory authorities and information exchange between them is a very important think to reduce the possibility of new appearance of similar cases of collapses and bankruptcies of Banks.

For the cases to search about the impact of systematic risk there were developed the "VaR models", (Value at Risk) to measure and evaluate the level of risk of Banks in any case by the assessments of the assets value and the jointed losses in order to find out the real Bank value. (Philippe Jorior, (2001), "Value at risk: The new benchmark for managing financial risk", New York :Mc Craw- Hill)

But after the deregulation on Banking functional environment, the risk of bankruptcies is greater and we must settle new rules and regulations and computations about Risk-adjusted assets of Banks.

To this direction established the three pillars of Basel II criteria and later the Basel III ,to confront the new most complicated risk environment and the higher uncertainty from the banking system of the interconnections of

factors of banking environment. (Credit Suisse Group, "The Basel Capital Accord: Consultative Paper of January 16, 2001: Comments, May.).

Also they developed a «Metric System for Capital adequacy», in order to strengthen the conduct or management of the preventing supervision.

So the committee was developed a new subject/ framework of "Banks Risk Management" , with active and passive tools and measures of policy, through the portfolio differentiation, to hedge the risk of the components and to measure the Net Worth (equity value) of bank.

Now is the "Capital Adequacy" measures (except the other indicators used, like Liquidity Index and Credibility Index, profitability and Equity/debt Indexes e.t.c ) putting the limits of the exposure to «credit default» risk and the other risks.

All these thinks been in a frame of "Risk-Based Capital", as it is deriving from the different positions of their portfolio of financial products and the risk (uncertainty) of them depending from the differentiated market changes.

4.1.The "credibility index" of Banks according the Basel criteria:

The need off 8% orlater 9% of Equity Capital to the risk-adjusted Assets of the bank, depending also from the degree of leverage (equity/total dept) and the maturity of loans, in relation to the short-term obligations of the Bank (putting f level of liquidity).

Also beyond the Liquidity risk, Credit risk among other, the "Market Risk" is very important. So the market Risk - adjusted asset, which contains the losses from the inadequate liquidity during a "tied money" period, through the interests rates and exchange rates volatility.

The Sensitivity to losses from the types of different product (Capital Assets) and the timing and momentum in capital and money markets.

So Basel committee (through BIS) put the set of regulations about the 8% of supervisory capital to total assets.

So we have to achieve the following

A) the need for immediate capital restructuring, to meet the Capital Adequacy.

B) the other alternative is the selling (by MBO or MBI) of the weak under collapse bank to other banks, incorporating all the assets and or even only the assets of bank or C) finally the full bankruptcy of the Bank.

According to the different methods referring below we have a brief description of them, to see the volume of Capital requirements.

According the "standardized method" ,which is so named by his structured and formal procedure of computations on Capital Assets of Bank, first for the "Interest Rate Risk", the method is based in a set of 13 different weighted limits of Maturity, within the net worth is computed between all the elements on balance-sheet and off-balance sheet items.

The weighs off computations are fluctuating from the 0,20% for positions till 3 months and until 12,5% for positions that their maturity is over 20 years.

Also for the "exchange rates risk" and the devaluation of share capital is 8%, comparing with the products of 15%.

But, as we can imagine this procedure is inadequate to find out the maturities of the elements and also there is a lack of precision to compute by 8% all the different things like stocks futures and currencies.

Also there is a lack about the differentiation of the different items of a bank's portfolio, because did not take in account the volatility of the returns of these elements.

After these we know that is enough difficult to find the exact outcome of differentiations between different classes of risk, like the "Market Risk" and the "Default Risk" ,that may be inter connected with the interest rate risk

4.2. The "Internal Rating-based models" and Risk Management

These inadequacies was the reason, that after the Basel II (1995) the regulation about "Market Risk" permitted to banks to use their own scheduled "Internal Rating-based model, for the needs of the minimum capital to be in the equilibrium with "Capital adequacy".

( Basel Committee, "Working Paper on the Regulatory Treatment of Operational Risk," September 2001).

Because Basel II and III recognized, that the same the banking firms had developed their advanced models for their more effective Risk Management .

So there was developed The «VaR models», that are more complicated, from the standardized method, because they used very clear and pragmatic quantitative inflows, for example the time horizon of 10 days, in confidence level 99%, with coefficient of Correlations, for the Same Class of Elements (eg. Interest rates and exchange

Finally the "max value of VaR" is the additional ( plus ) capital to be balanced for the requirements of capital Adequacy.

The mean VaR value in the Interval of 60 days, multiplying the "hysteria factor", that must not be less than 3.

This number/limit of 3 is determined by the Central Bank of the country.

MRG=max(K*1/60 S60i=1 VaRt-1 , VaRt-1)

The disadvantages and of this method lies in the weakness of the way of Computation of VaR (Value at Risk) coefficients, by the Central Bank, underestimating the estimations about VaR , as an Internal model of any individual Bank and the small time period of computations by the bank ,because the result for bigger periods will not be accurate.

Another approach developed by the "Federal Reverse board" of USA after 1995 is the so-called "pre-commitment Approach" where the bank is committed for the maximum losses for a time period and if exceed the declared losses the supervisory authority imposes a certain money penalty. So the choice of capital Adequacy is by the same the bank and FED is watching the divergences.

4.3.The "disclosure principle" about information and theMarket Discipline

The Pillar II of Basel also is referring to the disclosure of the financial information about the bank (and any firm). The target is to be recognized , from any investor the risks that exists with any bank. .

The new features and "building blocks" concept.Which are :

■ More driven approach, recognizing diversity.

■ Internal Ratings.

■ Operational risk.

■ Credit risk mitigation.

■ Securitization frame work

But many believes that , the new framework will be more effective, if it based on:

1. a stronger foundation of "Corporate Governance" , about Functions and Decisions within the banks

2. And the "improvements to internal reporting",

So, mainly here the targets , are the effective Risk Management and the rules of safety, internal Audit, so as to brink the so called "Market Discipline".

The control of the higher level of risk, by the market factors and investors.

So the publicity policy about the quality of Capital structure and Capital adequacy, the supervisory framework, the application of corporate governance rules, the methods of risk assessment and the level of capital shortages, from all the items and sources of capital means.

After the above, if the bank have effective systems of Risk Management^ then they might to reduce the capital requirements and to attract new clients, with a better dept behavior.

So it depends from the ability of the investor/depositor to decide if or not to invest in a bank A, that is high risky, because he knows that this bank invest (their money) in high risk investment products, or giving loans with greater degree of default, like the two (2) main Cypriot banks which have made investments, buying e.g. Greek State bonds from the secondary market and giving big loans to low credibility firms, given the losses from high default from them.

So we have the valuation of application of the basic principles , about the Banking Industry soundness.

By this way of the prerequisites of Basel Pillar III (of Basel committee) believes that will strengthen the stability of financial/banking system, named as "MARKET DISCIPLINE". That means to schedule the proper tools of disclosure to the public according the general principles of publication of all relevant information, that must cover the following principles ,(Schiniotakis N. - Sylligardos K., 2010, Bank Management and Financial Risk, Edition Disigma - Thessaloniki:

a) The publication principles and procedures.

b) The Capital Adequacy and Capital Structure.

c) Issues about the application of supervisory frame.

d) Corporate Governance and Internal Control.

e) Risk assessment and Risk Management.

f) The high (level) of the deficiencies and uncovered position.

All the above must be published two times, or at least once, per year.

Also, the committee made the proposition of the "test of Materiality", that means that the relative information is material, as long as the faulted expression or neglection could change the decision of the receiver according to the kind of decision to invest or deposit in a weak or very risky bank.

Because the whole frame of the deposits protection is changing, after the statements by the very new president of Eurogroup Mr. Dieselblum,( Nea Newspaper 2013,statements 26-03-2013) that the Cyprus Bank experience of the sudden cutting (haircut) of the deposit accounts of the people, is possible to be repeated and for other bank (in every states), if their Management fails and has deficits and losses from the "red loans", that can create a certain bankruptcy of the bank.

So, the same the depositors, must be transformed as investors, that means that they must be analyzing and watching the " statements of the bank "continuously and they must cover the deficits of the bank if it fail.

So depositors, must be transformed as new stockholders ,with impact the "cutting of a proper amount from their deposits to cover the losses.

This is a great turning point for the banking system functions and principles.

5. The criticism and the positive advantages about of Basel 11 and III - The impacts

After this new possibility to haircut the deposit accounts of banks we have a suspension of deposits safety and this is uprising the level A of systematic risk of Banking System. Because of the appearance of the "Bank run" phenomenon will be most frequently, as behavior of the depositors.

(Diamond, D.W. and P.H. Dybvig (1986): "Banking Theory, Deposit Insurance, and Bank Regulation," Journal of Business).

So after this, the depositors must be more informed and most careful to watch andanalyse the Bank Balance Sheet and accounts and the credibility, stability and soundness of every bank as financial firm.

So here we must make a reference to the weak points of regulations of the Basel II and III for to strengthen the Banks financial position. (Basel Committee, "The New Basel Accord").

Initially banks with effective Risk Management system, procedures and methodology, would be in a position to reduce effectively their "Capital Adequacy position", in order to attract better clients with better loan-taking behavior by reducing the interest rate of their loans, as a reword of their quality .

Specially in the sector of Retail banking and the Mortgage loans, in relation with the big Corporations loans given by other banks.

This event will change the Corporate Strategy of banks leading and directing them to increase their share market and for the SME's market for finance.

Simultaneously these effective banks takes a capital advantage, by the reducing the amount for Capital Adequacy, and so the bigger profits, from the low defaults rate, will make a more generous dividend policy, giving higher dividends and making higher investments. (Kareken, J.H., and N. Wallace (1978): "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," Journal of Business).

So depending to the assessment method a) the standardized method and b) the IRB-method, the first bank will be more vulnerable, to an MBI's (Management Buy In) aggressive movement -than the bank using the IRB method, which requires lower capital.

The reason will be that ,by the IRB method used by a bank , it will have more free Capital , from the amount of Capital Adequacy requirements.

An other impacts is, that bank with lower "credit rating" from the level of A. Then they will have 50% instead of 20% Capital requirements and so is obliged to find other ways for the short-term financing needs.

So depending for any banks with "credit rating" AA/AAA, ,the Capital Adequacy will be 20%. For example the weighed coefficient for Mortgage loans will be 35% (from 50%), if the bank uses the standardized method, and only 10% if uses the IRB method. Subsequently on the corporate policies some banks will be focused to finance special purpose loans, giving more credit products with lower interest rate.

So the level of disclosure (market discipline) imposed by Basel II, giving grater transparency, will lead the Banking firms to a better quality of their Portfolios.

And these events will attract more and better clients, because of the lower risk, to deposit their money to a bank named G.

So this need to be more conscious, about the usefulness to inform and analyze this framework of Basel committee ,is very important in any case.

So the rules and regulations of Basel II and mainly III, brings a new organizational chart for Banks.

6. The haircut of the deposits is a very catastrophic event for the confidence to banking system.

So, there is a real need to hire more experienced and educated clerks about «Risk Management techniques», which will be able to contribute more effectively , to decision making process on banking selection criteria.

Also is needed to buy new information technology for the accounting system and new risk management programs, to confront credit risk, credit rating, operational risk and market risk as the new components of Pillar III.

So the credit institutions must develop a modern business plan, with incorporation of Risk Management.

These firms would have the realadvantage , in the high Competitive banking market.

These banks with advanced Risk Management methods will give a greater security to their clients, investors and depositors and will survive in the competitive Banking Market. (Philippe Jorior, (2001), "Value at risk : The new benchmark for managing financial risk", New York : Mc Craw- Hill)

And we must point out that the relevant cost of operations and the higher cost of Capital will be counteracted by the greater safety of the bank and the safety of depositors and the sustainable development of the banks for the interests of workers, stockholders, depositors and any other stakeholder.

The need for a more effective framework of banks operations was more obvious after the financial crisis of 2008 and the impacts are the reformations and coverage of the weaknesses of Basel II regulations and Risk Techniques.

So after the G20 Summit of 2009, begins a new frame for more «effective financial governance».

Specially after the "de Larossiere report", the European Council , decided to create a new architecture of financial system, based on Risk Management and Risk-adjusted procedures.

The central/basic elements of this new schedule was :

1) The Creation of a " Systematic Risk Council', with the participation of E.C.B. and member the 27 governor of Central Bank of E.U. and the 3 presidents of European Supervisory authorities of Banking and Stock Exchange, plus a member of European Commission.

The duties of this council are to analyze information about the financial stability and the relevant propositions.

2) The establishment of a "System of Financial Supervisors" with the 3 supervisory authorities of E.U. for the harmonization of application of the Supervisory rules. At parallel there will settle and a national level auditors/super visors.

3) The strengthening of new more advanced rules based in the new provisions of Basel III about Capital Adequacy.

4) Subjects about the future of European System about the settlement of new procedures and "Crisis management" and bankruptcy procedures and possibly with the cooperation with E.C.B., for the definition of "settlement criteria group". And possibly the establishment of "deposits guarantee system', supplementary with the national systems. And the creation of "European Banking Union" under common rules, that will extend the security of the depositors.

7. Summarizing the new propositions and developments :

The uprising of "Risk Management Systems"and the"Internal Audit" of Banks, as a supplementary structure, because the fact that proves that the existing application of this system was not enough to predict and prevent a new financial crisis in the future.

So is discussing the application of a more severe Institutional frame about Systematic Risk.

But we ask, if is only the weaknesses of Institutions and framework to prevent the Crisis, is the unique factor dealing effectively with risk?

Because the fact from the real life shows that also that central banks and governments of the countries (like the Cyprus Case) are responsible for the Crisis. Because instead to confront the several difficult situation problems, they delayed to react and to intervene earlier to stop the crisis in-time?

The relevant references of the responsibilities are displayed in the every day newspapers of this period. As conclusion we have to refer that, the above framework of reasons, brings the confusion after the application of the above mentioned rules and regulations and, as it proved from the fact, it is no easy to change the habits and ways and practices and mentalities of banking clerks and managers.

It's known for example that all or some of the ex-presidents of the Laiki Bank of Cyprus (Popular Bank of Cyprus), violated and broken all the existed procedures of assessment principles and practices, to avoid the non-credible firms and entrepreneurs. None stopped them to broke the rules, none controlled the right application of criteria and so they increased by 9,5 billion € of new depts. In two (2) years period (2011-2012).

Where was the disclosure of the credibility analysis and the followed ratings for the safety of their shareholders and depositors?

Where were the "Risk management unit" and the proper references to Central Bank and the supervising mechanism of Central Bank, to prevent the destruction of the 2 bigger Cypriot banks?

Now the destruction and the collapse of the banks come with a very strict and sadden way.

Where is now the credibility of the banking system?

Where are the methods and procedures to confront the bank risks?

Why the financial system has not enough strong policies and practices to avoid them?

8. The violation of European Union principles of solidarity and stability of Banking System

After the above has risen a big problem and a big question.

Where is the European Solidarity to countries which are in crisis?

It seems that the nationalistic interests of some countries, are now the new concept for a new beginning for banking policy.

This is the forced collapse of Cyprus Banking system and so the collapse of the 40% of the GDP of the country, because the banking sector was 7 times greater that the GDP. And within an intension to punish Cyprus, the Eurogroup decided in 15 March 2013 to resolve the second (in size) bank "Laiki" (Popular Bank of Cyprus) and to haircut the 70%-80% of the depositors accounts and 30% of the next "Cyprus Bank", which is the biggest of the Country. (Kathimerini Newspaper, 2013, 24-3-2013)

But the most disappointed matter is the statement of the president of the Eurogroup, that the Cyprus Economic model must change by a violent way and this is valid for all the banks everywhere in Eurozone. So the possibility is open to apply this kind of haircut of deposits for any bank having deficits. ( Kahane, Y. (1977): "Capital Adequacy and the Regulation of Financial Intermediaries," Journal of Banking and Finance)

This is a "Tectonic Movement" of the "Safety Principles" of the banking System and destroys the holly cows of the bank industry.

The result, the great concern and fear to all depositors of the member states of Eurozone (17 members) and the whole the E.U. (of 27 members).

As a result the immediate fall of Euro exchange rate to lowest level of the last 6-months.

The decision of Eurogroup - 15 of March as an outrage action . The need of " European banking Union" (EBU):

The existence of European Banking Union will delay or inert the speed of the oncoming crisis. The absence of the EBU between the countries of the Eurozone will make to multiply and complicate the crisis phenomenon. So delays for the existing European Banking Union will increase the systematic risk for the banking system of Eurozone.

And in this case we have a greater fear of a «sudden death» phenomenon, that is not restorable, having as result the depositor losses.

The provisions for the creation of " European banking Union" (EBU) are:

1) The right of European authority to decide for "life and death" of every bank, every even big bank.

2) Enforcement from the ESM mechanism, with liquidity and capital to the viable banks, if the bank needs this liquidity.

3) European guarantee for the deposits safety (till 100.000 € per person).

We are very astonished and questioning, if the Cyprus banks phenomenon of sudden collapse would not appear, if in this period of time there was established the EBU and the guarantee from this Union.

Now a days the German political and economic power, postponed the banks unification, under the point of their own national interests and interests of German banks. This means:

a) that the common currency unit (Euro) was demolished, because of the "two speed situation", as long as the 100.000 guarantee of deposits , will not be equal for Germany and the other weak economically states.

b) The massive refuge of the deposits and capital from the weak country with the weak guarantee. This is the reason for the deposits guarantee.

c) The aftermaths of the «Deauvills decision»(French city)of European Council, before two and a half years, whichdecision was the reason ,initially for the devaluation of the bonds values and secondly, this evil goes to the devaluation by the haircut of the deposits (bail in) of peoples deposits in Banks.

Under this situation of the asymmetric density of Eurozone, we have the increasing of the capital movements

towards the Banks of North of Europe (Sweden, Finland, Germany, Nederland) also in Swiss and even towards U.S.A. and other "tax heavens" worldwide.

Another basic question is, the case where the Cypriot banks was in a position to cover the 9% of «tier 1 capital», if they have enough time with inner resources .

Here we must point out , that the "European Banks Authority - EBA", was estimated that the two bigger banks of Cyprus (Cyprus Bank and Popular Bank), was needed to cover the following amounts:

A) A 3,6 billion € from the case of Greek state debt haircut, by the P.S.I., after the Troika's decision.

B) The additional (plus) losses from the degradation of Cyprus bonds in the level of Junks.

C) Plus the losses from the defaulted loans, to a sum of 23 billion or the 23% of the total loans.

The additional initial aid from Cyprus state, of 1,8 billion in July 2012, was quite inefficient to solve the problem.

The public debt of Cyprus was uprising from the 49% of GDP in 2008, to the level of 87% in 2012.

So Cyprus was needed a total sum of 17 billion € and the 10 billion of them was given from the Eurogroup .

The remaining 7 billions must be founded from the inner of the country.

So Eurogroup decided to shrink the bank sector of Cyprus gradually till 2018, destroying the economic model of the island, which was based in the service sector of banking, which was really over-volumed and overvalued.

Many academics, journalists and politicians were stated that:

The restructure of Cyprus model ,was founded on the principles of the extreme ideological frame of Neo-liberalism.

The model was based on the hot money movements, or even partially on black market capital, by the different kinds of speculators.

The "No voting" by the Cyprus parliament, was a very controversial act according to the conservative groups and the real situation needed to cover the deficits and debts of the banking system, through the bail in.

The real problem of the Cypriot banking System is the situation , that it holds and manages Capital of 8 times bigger than the GDP, without having their own capital corresponding to the deposits (and the rest of assets) to refund the above mentioned needs, according to the Basel II Capital Adequacy criteria.

So , many of them said that a good solution would was, to use the "bail in" and sources from the internal capital market of the country, that was enough to cover the deficits of Banks, without to put in chaos the Cyprus economy.

9. Conclusion

The inefficient of supervision and controlling procedures of financial system.

The recent financial/crisis showed the weaknesses and inefficiencies of financial system and the results of the «deregulation» of banking system procedures and their soundness. Also we can see the gaps in the system regulations to prevent the disruption phenomena and the effectiveness of crisis management to a rout for the solution of crisis.

So we have to understand the negative impacts that imply the revision of the whole framework of system calibrations and right application of the preventive rules and regulations and functions concerning corrective measures, relating on Banks actions.

This is the basic factor that contributes to the appearance of the deepening and the extension of crisis and later the recession in the economy.

Which is the role of the great development of a numerous banks and other financial institutions and the great number of interconnections and the complexity of the existing and disposal financial products, which created the expansion of the level of crisis and the disability to control the negative tendencies leading to the recession, in counties like Greece with the huge fiscal problems.

After this phenomena we must go to a new improved architecture of the world and European financial system, upon which must be applied the supervision of financial system in European and world level.

This means to establish new structures functions ,rules and regulations , that must be able to prevent the financial/Banking crisis in the future, in order to make milder the impacts of crisis to Banks ,enterprises and the totality of economic system.

The basic pillar of this new architecture will be a new kind of regulations about the supervision and control and analysis of the relevant information and data about the quality functions of the Banking/financial markets and institution. With main targets to analyze and evaluate risks, facing the appearance of the negative impacts of financial functions.

All the above, in relation to the specific purpose, about the right way and the validity and capacity of system management and the supervision of all kinds of financial institutions, for their compliances with the new credible rules about the banks.

Functions which in other case will lead in crisis, the components/parts or the whole financial system focused to a situation of the general stability of the financial system.Follow belowa table of indices of the Greek economy about debt,

as estimations of Bank of Greece

2008 2009 2010 2011 2012 2013

Debtineuro | 260.439 297.264 334.273 358.793 328.412 331.120

Debtinothercurrencies 1.632 1.260 6.013 9.185 14.818 21.200

?. Debtofcentral government l 262.071 298.524 340.286 367.978 343.230 352.320

As % of GDP 112,50% 128,90% 149,70% 171,10% 170,80% 182,50%

?.Debtofbroadpublic minus investments in public bonds. 25.042 24.682 13.555 9.910 4.590 4.600

C. Debtofcentralg overn me nt as ESA (A+B) 287.113 323.206 353.841 377.888 347.820 356.920

As % ofGDP 123,30% 139,50% 155,70% 175,70% 173,10% 184,90%

D. Debtoflocalgover-minusintra government debt -23.829 -23.522 -24.307 -22.288 -7.220 -10.720

S?. Debtofgeneralgover-(C+D) 263.284 299.684 329.534 355.600 340.600 346.200

As % ofGDP 113,00% 129,40% 145,00% 165,30% 169,50% 179,30%

GDP 232.920 231.642 227.318 215.088 200.906 193.078

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