A review of the Principles of Banking

The Principles of Banking, written by an experien-ced banker and seasoned finance academic, Professor Moorad Choudhry, should appeal to everyone involved in the banking industry as well as to students of finance. The Principles of Banking covers issues of practical importance to bank practitioners, including asset-liability ma-nagement, liquidity risk and management, capital management and stress testing as well as issues of bank strategy and corporate governance. It is replete with worked examples illustrating the key principles of asset-liability management. Viewed against the background of the global financial crisis, this book is a useful reminder of how basic principles of banking had taken a back seat or been simply ignored. 

According to Moorad Choudhry, the crash of 2007-2008 was as much a crisis of liquidity as it was of capital erosion. Many banks ran a funding regime that was heavily overweight in short-term liabilities and volatile liabilities, such as wholesale funds. When wholesale funds dried up, banks were exposed to severe liquidity strains. The financial crisis has re-emphasized the importance of liquidity to the functioning of financial markets and the banking sector. Indeed, it has highlighted the need for banks to ‘get back’ to the roots of banking and concentrate on liquidity management, which is the essence of banking.

Banks entrusted with the savings of customers have a clear responsibility and the key ingredient to discharging this responsibility is the banks’ management of their assets and liabilities. Liquidity is also a key focus of bank regulators in the post-crisis era. In response to the global financial crisis, the Basel Committee on Banking Supervision developed a comprehensive set of reform measures to strengthen the regulation, supervision and risk management of the banking sector. These measures commonly referred to as Basel III, aim at improving the banking sector’s ability to absorb shocks arising from financial and economic stress, reinforce risk management and governance, and enhance banks’ disclosures and transparency. The reforms, while targeting bank-level or micro-prudential regulation, also have a macro-prudential focus to address system-wide risks that can build up across the banking sector as well as the pro-cyclical amplification of these risks over time. The way banks are adjusting to the new requirements of Basel III is a clear reflection of the acceptance of liquidity as a prime causal factor of the crash. Basel I and Basel II did not concern themselves with liquidity, but only with capital. The new regime, which will be introduced from next January and be fully implemented by 2019, makes material demands on banks with respect to the way they manage liquidity.

While Basel III has been developed for internationally active banks, the Bank of Mauritius supports the under-lying objective of Basel III reform pac-kage, which is to strengthen the resi-lience of the banking sector and intends to implement measures which are rele-vant to the Mauritian jurisdiction in a phased manner. In this connection, the Central Bank has issued a Consultation Paper on the Implementation of Basel III in Mauritius in October 2012 which was subsequently followed by the issue of a draft Guideline on the Scope of Application of Basel III and Eligible Capital in May 2013.

Overall, The Principles of Banking provides a useful framework for the analysis of risks facing banks. Bankers will surely find in Professor Choudhry’s mix of practical knowledge in the field of risk and treasury management of banks and his rigorous academic approach a useful guide to a more sustained business model for their banks. The book will also appeal to regulators in the pursuit of their objective of maintaining a stable banking system. It is an invaluable practical guide and I recommend it to those involved in the banking industry.