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Organizational form as a source of systemic risk

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  • Bholat, David
  • Gray, Joanna
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    Abstract

    Systemic risk now occupies centre stage in discussions of bank regulatory reform. Systemic risk is often seen as a problem of size, operational complexity, interconnectivity and contagion. It is less often discussed in terms of the institutional framework of legal rules and principles within which financial intermediation takes place, and the organizational culture promoted by those structures. In this article we redress this deficit through an appraisal of Northern Rock, illustrating the consequences of its transformation from mutually owned building society to publicly held company on organisational culture. These changes had profound effects on the incentive structure of its owners and managers, as profit-maximisation and shareholder value became the driving force within the firm, as in much of the rest of the UK banking sector. Thus, in addition to grappling with risk and uncertainty-and taking care to distinguish between the two-current efforts to construct a new macro-prudential regulatory paradigm should recognise the importance of Frank Knight's third key conceptual category-profit. Furthermore, in seeking to understand systemic risk, it becomes necessary to delve into micro-legal concepts such as property, trust, and contract that govern different forms of business to discern whether or not some modes of financial association create a greater degree of systemic risk than others. This is especially so when one organizational model comes to dominate retail markets, as did the publicly held company in the UK banking sector at the turn of the twenty-first century. --

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    Bibliographic Info

    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 7 (2013)
    Issue (Month): 27 ()
    Pages: 1-35

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    Handle: RePEc:zbw:ifweej:201327

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    Related research

    Keywords: Northern Rock; systemic risk; banks; building societies; UK residential mortgages;

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    References

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    1. Stuart Dawley & Neill Marshall & Andy Pike & Jane Pollard & John Tomaney, 2011. "The Labour Market Impact of the Run on Northern Rock: Continuity and Evolution in an old Industrial Region," Papers in Evolutionary Economic Geography (PEEG), Utrecht University, Section of Economic Geography 1109, Utrecht University, Section of Economic Geography, revised Jun 2011.
    2. Calomiris, Charles W., 2008. "The subprime turmoil: what’s old, what’s new, and what’s next," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 19-110.
    3. Capie, Forrest & Billings, Mark, 2004. "Evidence on competition in English commercial banking, 1920 1970," Financial History Review, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 69-103, April.
    4. Robert Wade, 2009. "Iceland as Icarus," Challenge, M.E. Sharpe, Inc., vol. 52(3), pages 5-33, May.
    5. Martin Weale, 2007. "Northern Rock: Solutions and Problems," National Institute Economic Review, National Institute of Economic and Social Research, National Institute of Economic and Social Research, vol. 202(1), pages 4-8, October.
    6. Eugenio Cerutti & Stijn Claessens & Patrick McGuire, 2012. "Systemic risk in global banking: what can available data tell us and what more data are needed?," BIS Working Papers 376, Bank for International Settlements.
    7. Basil J. Moore, 1979. "The Endogenous Money Stock," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 2(1), pages 49-70, October.
    8. Victoria Chick, 2008. "Could the Crisis at Northern Rock have been Predicted?: An Evolutionary Approach-super- 1," Contributions to Political Economy, Oxford University Press, Oxford University Press, vol. 27(1), pages 115-124.
    9. Davies, Richard & Richardson, Peter & Katinaite, Vaiva & Manning, Mark, 2010. "Evolution of the UK banking system," Bank of England Quarterly Bulletin, Bank of England, Bank of England, vol. 50(4), pages 321-332.
    10. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
    11. Dow, James, 2000. "What Is Systemic Risk? Moral Hazard, Initial Shocks, and Propagation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 18(2), pages 1-24, December.
    12. Martin, Roderick & Casson, Peter D. & Nisar, Tahir M., 2007. "Investor Engagement: Investors and Management Practice under Shareholder Value," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199202607, October.
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