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Organizational form as a source of systemic risk

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  • Bholat, David
  • Gray, Joanna
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.

Suggested Citation

  • Bholat, David & Gray, Joanna, 2013. "Organizational form as a source of systemic risk," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-35.
    • Handle: RePEc:zbw:ifweej:201327
    DOI: 10.5018/economics-ejournal.ja.2013-27
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    Cited by:

    1. Suss, Joel & Bholat, David & Gillespie, Alex & Reader, Tom, 2021. "Organisational culture and bank risk," Bank of England working papers 912, Bank of England.
    2. David Bholat & Rosa M. Lastra & Sheri M. Markose & Andrea Miglionico & Kallol Sen, 2018. "Non-performing loans at the dawn of IFRS 9: regulatory and accounting treatment of asset quality," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(1), pages 33-54, January.
    3. Bholat, David & Lastra, Rosa & Markose, Sheri & Miglionico, Andrea & Sen, Kallol, 2016. "Non-performing loans: regulatory and accounting treatments of assets," Bank of England working papers 594, Bank of England.
    4. Bholat, David & Brookes, James & Cai, Chris & Grundy, Katy & Lund, Jakob, 2017. "Sending firm messages: text mining letters from PRA supervisors to banks and building societies they regulate," Bank of England working papers 688, Bank of England.

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    More about this item

    Keywords

    Northern Rock; systemic risk; banks; building societies; UK residential mortgages;
    All these keywords.

    JEL classification:

    • K - Law and Economics
    • N - Economic History

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