This research empirically investigates how and to what extent bank subordinated debt plays a role in providing market discipline whereby the private sector is deployed to monitor and influence bank risk taking, hence complement government supervision and regulation of banks. The study comprises four essays on the use of subordinated debt as an instrument for creating direct and indirect market discipline, with specific reference to the case of the UK banking industry. Broadly, Chapters 2, 3 and 4 examine the effectiveness of subordinated debt as an instrument of direct market discipline; Chapter 5 approaches the issue of indirect market discipline. First, we analyse whether the risk premiums or yield spreads of subordinated debt indicate banks’ financial health. Our results show that yield spreads contain timely and accurate information on issuing banks’ risk taking, and this underpins the proposals that advocate forcing large financial institutions to issue subordinated debt to the public on a regular basis. Then we examine whether the issued subordinated debt and its price have any impact on banks’ performance. The results have positive signs, implying that the signalling and influencing effects of subordinated debt can induce banks to act prudently and restrain them from assuming unsound risk. However, the final chapter finds that the UK financial regulator, the Financial Services Authority (FSA) has little enthusiasm for utilizing the subordinated debt to indirectly discipline financial institutions. This reflects the FSA’s doubt as to the usefulness of the market in providing disciplining effects. In contrast, the evidence documented in this research shows that the subordinated market proves to be sensitive to bank risk, and banks do respond to market information, hence it can be an effective mechanism for generating useful market discipline. In reforming the financial regulation regime, adding new regulations to the old is therefore not the best way forward. Rather, priority should be given to reforming the paradigm of financial regulation by allowing more room for the subordinated market to discipline the regulators to take more prompt and rigorous corrective actions.

This dissertation concentrates on the issue of relationship between the banking industry and the small and medium size enterprises (SMEs, for short) in the early years of transition of the Polish economy (1989-95). In particular the problem of credit rationing of and discrimination against SMEs by the commercial banks is investigated. We attempt to find out whether credit rationing by banks have contributed to the widening/maintenance of the 'gaps' in financing SMEs. We endeavor to explore the extent to which credit rationing has impinged on the development and expansion of the Polish SMEs. Because credit rationing and finance gaps can stem from imperfections/failures on either demand-side (SMEs) or supply-side (banks), or both, our intention is to examine both of them to get a complete and comprehensive picture. In this thesis we bring together two branches of the theoretical and empirical literature: The first strand explores the issue and real implications of credit rationing, and the second one concentrates on the rationale, scope and effects of finance gaps. The analysis is based on two type of data: (1) aggregated data published by the National Statistical Office and the central bank; and (2) micro-data collected by means of a questionnaire distributed amongst SMEs and banks. This thesis consists of six chapters and is organized as follows. Chapter I introduces the topic of credit rationing by reviewing the literature of this subject and provides the terminology, and definitions employed in the subsequent chapters. Chapters II and in are focused on the development and financing of the SME sector, whereas Chapters IV and V discuss the commercial banking sector development and lending policies. The first chapters of each pair rely on macroeconomic data, while the second ones analyze the responses to the aforementioned questionnaires. Discussion in each chapter is supported by a comprehensive data provided in specified Appendices. At the end of Chapters III and V we attempt to summarize the most important lessons and assess whether the evidence collected supports the main hypothesis delineated above. Chapter VI offers some concluding remarks and suggests policy recommendations to improve the bank-business relationships. The findings of this dissertation generally confirmed the hypothesis of weak and strong credit rationing of SMEs exercised by the banking industry in the first years of transition in Poland. Although the results are far from conclusive, they are sufficiently important to give the credit rationing issue policy relevance. Our suggestions for closing the gap between demand and supply of finance to SMEs consisted of three parts: (1) what the financial system should do to improve the quality and quantity of services, and products provided; (2) what actions the government should undertake to increase competition, reduce uncertainty, and increase availability of funds to the SME sector; and (3) what SMEs can do to be perceived as more reliable and creditworthy. If the banks are to play a significant role in the economic recovery and growth, which, as the experiences of other countries have shown, is mainly facilitated by strong development and expansion of an efficient SME sector, increased and coordinated efforts to improve the relationships between those two sectors are essential and the involvement of all interested parties is required. The long-term benefits of consistent policies promoting sound banking and efficient enterprise sector by far exceed the short-term costs.

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The aim of this thesis is to investigate operational risk management with a special emphasis on people risk. The motivation to implement research in this particularly challenging area of risk management is twofold: Firstly, the increasing magnitude of operational losses as a result of people over the last decade and their negative effect on the banking industry. Secondly, literature on operational risk in banking has focused on measurement of operational risk and capital adequacy, and is therefore inconclusive on several vital questions regarding the qualitative elements of operational risk, particularly people risk management. By way of interviewing operational risk managers, junior bank operatives and operational risk consultants with regard to operational risk management in general and people risk in particular, this thesis contributes to the existing research on operational risk in several ways. This study enhances understanding of the effect of the limited definitions, processes and practice with regard to both operational risks in general and people risk in particular. The study also provides a detailed account of the regulatory influence on ORM and also draws attention to the role of the Board and senior management particularly the tone at the top and in the process highlights, the difference between what they say and what they do, and the effect that this has on operational risk and people risk management. The current study also extends present understanding in relation to the contradictions between the three lines of defence in theory, and as discussed in the industry, and in the process also highlight how it operates (or does not) in practice. In particular the study identifies and examines the development of sub-lines of defence (la and Ib) which are filling gaps within the three lines of defence, particularly the qualitative elements and specifically people risk. More importantly the study proposes and examines a framework for people risk management and in the process also proposes an intermediary people risk management function which sits in the three lines of defence and, is staffed by human resources and operational risk which are currently managing elements of people risk separately.

The extensive use of technology by banks and financial institutions aims to respond to customers’ demands by providing efficient, speedy and convenient financial services. After developing the e-banking services, banks have also expanded their online services into e-commerce. Developments of e-banking services and e-commerce have been the case with the majority of banks including Islamic banks in the GCC region. The main aim of this research is to explore the demand and supply conditions of e-commerce through e-banking services in Saudi Arabian conventional and Islamic banks. In doing so, this research aims to assess the level of customer awareness of e-commerce and to explore customers’ motivation in Saudi Arabian conventional and Islamic banks. In addition, this research further explores and evaluates customers’ use of e-commerce and e-channels banking services, and the obstacles faced including security issues. In an attempt to locate the supply side related issues, the study aims also to explore perceptions of the IT managers in the six banks. In the study, data were collected through a survey questionnaire to measure the opinions and perceptions of bank customers, and interview surveys were utilised for assessing the supply conditions. To achieve the aims of this research, firstly, this research presents the initial findings with the objective of developing a better understanding of customers’ preferences based on their opinions and perceptions, expressed through a questionnaire survey with a sample of 198 Islamic and conventional bank customers representing six banks in the country; secondly, to further the analysis of this research, an empirical study is presented by using a series of semi-structured interviews with IT managers at three different levels of the sampled banks in Saudi Arabia. The findings over five empirical chapters demonstrate that the majority of the respondents from both the banks appear to understand and have awareness of the importance of e-commerce especially and e-banking services in particular. The findings also indicate that the majority of the respondents from both banks tend to be equally motivated to deal with e-commerce using banking facilities available for them. In search of motivational factors, this research found that the benefits and the 24/7 availability of e-commerce and e-banking services were the main factors motivating participants to deal with e-commerce and use e-banking services. The findings also indicate that the customers of Islamic banks have a better understanding of using e-commerce and e-banking services. Furthermore, the findings show that customers experienced personal, institutional and macro level obstacles to using e-commerce in both the bank types. Moreover, the customers of Islamic and conventional banks appear to understand the importance of security issues in e-commerce through e-banking services as well as banks. The findings also show that the government of Saudi Arabia has played a key role to improve the environment of e-banking services in Saudi banks. Finally, the interviewees’ analysis indicates the weaknesses in the telecommunication infrastructure. Based on the findings this study suggests that e-commerce through e-banking services can play an important role in expanding business opportunities in Saudi Arabia, while they facilitate individual engagement with commercial activities. Since the technology is expanding and advancing rapidly, and to address the future challenges in IT especially in the e-banking services, it is essential that the necessary infrastructure should be developed to take advantage of the opportunity.

The recent surge of foreign reserves in emerging markets has sparked fierce debate about what level of reserves is the optimal amount for a country. Conventional models have achieved important advances in understanding the behaviour of central banks’ reserve policy, but fail to find convincing solutions to the puzzle of why emerging economies, and China in particular, would continue to accumulate massive reserves. With reference to China’s massive hoarding of foreign reserves, this thesis develops a representative agent model with elements of dynamic stochastic general equilibrium (DSGE) modelling. The model constructed in this thesis explicitly considers the risky steady state as the equilibrium point when agents take into account future uncertainty but when the shock realizations are zero. In this risky steady state we derive the optimal reserves for emerging markets, with particular reference to the Chinese case. The precautionary savings motivation for holding reserves is then analysed within this framework. This thesis derives the optimality of Chinese reserve accumulation, and provides a plausible explanation for reserve build-up in China and its underlying driving forces. In order to better understand the foreign reserves accumulation, this thesis further attempts to analyse current external wealth allocation in a portfolio perspective within a DSGE framework. A two-country model is employed, and a Value at Risk (VaR) constraint is introduced to reproduce the risk averse behaviour of investors. After accounting for risk diversification, our findings imply that an investor would shift their portfolio holding to bond related assets. Finally, China has accumulated a huge amount of foreign reserves. The majority of these assets are denominated in the US dollar. Furthermore, in terms of asset type, the US T-bill is the dominant investment instrument in China’s international portfolio choice. This raises questions as to why the central bank of China chooses to make such an investment decision, and what the global repercussions might be. Therefore, China’s role in the growing demand for global safe assets deserves exploration. Given the world-wide shortage of global safe assets, to what extent China will continue the current international investment decision, and the driving forces behind such policy inertia, are major concerns. In order to gain a better understanding, this thesis applies a global solving method, as well as a standard local solving method.

Islamic finance, emerged in modern times, as a religiously or Shari’ah constructed financial method and institution with the objective of providing religio-ethical financial solutions. Due to its different and unique nature, it is considered by that a special accounting system based on Shari’ah that fulfils the particular requests of Islamic finance instruments is required. For this purpose, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) have been issuing and developing Islamic accounting standards. Nevertheless, those standards are not adopted by most of the Islamic financial institutions (IFIs) that are still reporting with International Financial Reporting Standards (IFRS), which are issued for conventional financial institutions. It is, on the other hand, claimed that IFRS may be irrelevant to the needs of other cultures and people of the world especially for institutions emerged from Islamic worldview, such as Islamic banks and financial institutions due to the nature and working mechanism of these institutions. This study, hence, aims at exploring and critically investigating the main environmental factors influencing the adoption of IFRS to IFIs. This study also aims to investigate empirically the need for special accounting treatments for Islamic financial institutions that is reliable worldview, and in consistent with the values and socioeconomic formation of Muslim society by harmonising or merging with AAOIFI and IFRS. The identified research questions were responded through primary data collected from a survey questionnaire, which, among other things, mainly attempted to explore IFIs in relation to their position as to whether they would prefer to account under IFRS issued by the IASB or under the Financial Accounting Standards or FAS issued by the AAOIFI. This questionnaire, also aimed at exploring the perceptions of the participants regarding accounting practices employed in different Islamic institutions and the issue of considering adopting a particular accounting system that satisfy their needs if it is available. In addition, the questionnaire also aims to investigate the perceptions of the participants on the nature of Islamic finance and whether IFRS is considering its special needs. Furthermore, particular attempt is made to measure the perceptions on rationalising Islamic accounting as a practice and as a paradigm. The study finds that most of the IFIs participated in this study employed IFRS’ as the main accounting system, which resulted in a number of problematic issues in treating Islamic finance transactions and contracts and endogenising other religious elements, such as the prohibition of riba and paying zakat. The findings also indicate that employing IFRS in the IFIs is not applicable within the normative world and the requirements of Islamic finance as aspired by the foundational axioms developed by Islamic moral economy despite the extensive use of it in current times. Therefore, in order to be authentic IFIs require special accounting standards that are different from the IFRSs, such as AAOIFI accounting standards, which may be considered as rationalising the emergence of Islamic accounting as a practice and field, which was the case in history.

The recent financial crisis beginning in August 2007 depressed the world economies and disrupted the operation of conventional monetary policy instruments. Dramatic increases of three-month LIBOR rate in different currencies were observed and the spread between three-month LIBOR and OIS widened. These phenomena implied a broken transmission mechanism of monetary policy. The central banks of the UK and the US launched unconventional monetary policy tools i.e. liquidity provision and quantitative easing to stimulate domestic economies bypassing the banking systems. The European Central Bank implemented the Enhanced Credit Support scheme to provide liquidity to the banking system as well as fixing the monetary transmission mechanism. As a consequence, much research has been undertaken to study the impact of the unconventional monetary policies on economies. Most of the literature has studied the effect on long-term variables e.g. GDP, inflation and unemployment. But, our study here focuses on the impact of those policies on the credit and liquidity premia in the money market as represented by interest rate spreads. This aspect is important because the transmission of quantitative easing in the UK and the US to ultimate targets relies intermediately on reducing the cost of borrowing and interbank lending rates are the foundation for many market rates. In the EMU, to fix the monetary transmission mechanism, restoring the communication between EURIBOR and OIS is the primary step. Our results show that both credit and liquidity premia were the drivers of the widening LIBOR and OIS spreads. The quantitative easing in the UK and the US and Enhanced Credit Support in the EMU reduced credit risks and liquidity premia significantly, relying on the causality between the two premia, respectively.

This research utilizes the seminal index from Dincer and Eichengreen (2013), which includes values for 120 countries from 1998 to 2010, to examine the effects of the level of central bank transparency on output and financial market volatility. In addition, this paper explores whether a degree of optimal transparency exists.

After 30 years of acting as a socialist country, political chaos, and nearly three decades of central planning control, Libya remains in the early stages of its financial liberalisation and reform. In 2003, Libya made a strategic move in order to cope with emerging challenges in the era of globalisation. This move involved the reformation of the role of the central bank in order to promote its effectiveness in managing monetary policy for economic growth and development. The broad aim of this thesis was to develop a conceptual framework and a research model that relate to the role of the central bank in Libya’s economic reform programme between 2003 and 2010. This research aims to identify the most applicable prototype for the role of CBL and to evaluate a suitable approach to carry out an effective process that will ensure Libya’s economic growth and integration into the increasingly globalised community. As such, this study contributes extensively into the subject of Libyan economic development by examining the data required to assess the effectiveness of the economic reform packages and the country’s preparedness to finalise its switch to a market-based economy. The Libyan case is extremely significant for a number of reasons. One of these key reasons is that the economic reform programmes have been considered as one of the government’s top priorities since 2003 following the lifted UN and US sanctions. Another reason relates to the fact that the CBL has been keen on developing its policies. Finally, the Libyan experience could provide new insights into the debate on the role of CBL and effectiveness of economic reform programmes and the underlying conditions for success. This empirical study investigates the determinants of economic reform and central bank performance within the Libyan economy by utilising data from a range of primary and secondary sources and employing a multi-method analytical approach. Self-administered questionnaires were distributed to the target population in the Libyan central bank and a number of Libyan specialists possessing knowledge of banking decision-making processes. A total of 135 questionnaires were distributed and of these, 106 were returned completed and usable (a response a rate of 78%). Twelve semi-structured interviews were held with managers in the CBL and IMF and members of the Libyan General National Congress, see (Table 4.4:2). The third method of data collection used economic data covering the 2003-2010 period. This data was analysed to examine whether best central banking practices is transferable from other states to the Libyan context. As a result, this study offers some generalizable knowledge that can also be applied to other developing countries, particularly those with a similar economic structure. The primary contribution of this study is that it highlights the implications of globalisation for central banks in the process of financial sector surveillance, monetary management, and macroeconomic stabilisation. The key findings are (1) the economic reform programme variables have an impact upon various features of the Libyan Central Bank’s (CBL) performance variables within a correlation model; (2) the CBL has a significant effect on Libyan economic growth and this effect remains strong even after controlling the banking sector and other control variables; (3) the evidence supports the view that the relationship between the CBL’s development and economic activity in emerging economies is bi-directional. Given that it is the first attempt to empirically investigate the impact of an economic reform programme on central bank performance in Libya as an emerging economy, this study makes an original contribution to knowledge. This study is also the first of its kind within this topic area to utilise a mixed-method approach. This research project provides an important introduction to this area and has attempted to explore its significance. This research adds to the existing body of literature regarding the development and application of a series of models of economic reform, central bank performance, and economic growth in a developing country. Brief recommendations regarding potential useful directions for future research are offered towards the end of the thesis. These recommendations form a strategic framework for the improvement of the CBL as it plays an active role in meeting the developmental and reform challenges facing the Libyan economy.