The Principles of Banking, 2nd Edition

Foreword

Henrique Fragelli

As in many fields in history and science, financial markets have evolved based on a continuous interaction of new technological innovations, the temporary disequilibrium that their insertion in the system generates, many times resulting in crisis, and following this process the governance response to handle the learnings of the crisis. As this is a dynamic process, we often have at the same time the governance response being introduced concomitant to new technological innovations. In a world where technological development is accelerating in an exponential way, we have a scenario of constant changes both from the technological and the governance side. This presents governance and risk management challenges.

In the context of the process above described, I believe we've been observing interesting dynamics over the past decade or so. It is often said that the great financial crisis of 2008 was largely exacerbated by the level of leverage in financial markets, and as a response to that regulators increased the level of capital requirements, particularly for systemically important financial institutions. Since that increase in the levels of capital requirement, we can observe that the resiliency of financial markets has materially improved. However, one of the undesired consequences of the new regulations is that financial institutions, particularly the large ones, had to entrench themselves in the more profitable businesses, and as a result financial ...