Professor Shelagh Heffernan is currently Professor of Banking and Finance at Cass Business
School, City University, London and has been a visiting Professor at several universities.
Modern Banking is her fourth book.
A former Commonwealth Scholar at Oxford University, Professor Heffernan is also a
past beneficiary of a Leverhulme Trust Research Award, which funded new research on
competition in banking, and recently received a second award from the Leverhulme Trust.
She publishes in top academic journals – her paper, ‘How do UK Institutions Really Price
their Banking Products?’ (Journal of Banking and Finance) was chosen as one of the top 50
published articles by Emerald Management Review.
Current research includes: SMEs and banking services, the conversion of mutuals to bank
stock firms, monetary policy and pass through (funded by an ESRC grant), and M&As in
banking. Professor Heffernan is an Associate Member of the Higher Education Academy
and has received two Distinguished Teaching and Learning awards.

CHAPTER 1
What are Banks and What Do They Do? 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Meaning of Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Organisational Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.4 Banking Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 Financial Conglomerates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.6 Central Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.7 Summary: Why are Banks Special? . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
CHAPTER 2
Diversification of Banking Activities 41
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.2 The Expansion of Banks into Non-banking Financial Services . . . . . . 41
2.3 The Effect of Non-interest Income on Banks’ Total Income . . . . . . . . 51
2.4 Global Markets and Centres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.5 International Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.6 Banking Issues in the 21st Century . . . . . . . . . . . . . . . . . . . . . . . . . 72
2.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
CHAPTER 3
Management of Risks in Banking 101
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
3.2 Key Financial Risks in the 21st Century . . . . . . . . . . . . . . . . . . . . . . 103
3.3 Approaches to the Management of Financial Risks . . . . . . . . . . . . . . 113
3.4 Financial Derivatives and Risk Management . . . . . . . . . . . . . . . . . . . 125
3.5 Management of Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
3.6 Management of Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
3.7 Risk Management by Major Global Bank . . . . . . . . . . . . . . . . . . . . . 169
3.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
CHAPTER 4
Global Regulation of Banks 173
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
4.2 Why Regulate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
4.3 International Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
4.4 Basel 2 – The Three Pillar Approach . . . . . . . . . . . . . . . . . . . . . . . . . 192
4.5 Alternative or Complementary Approaches to Basel . . . . . . . . . . . . . 210
4.6 International Financial Architecture . . . . . . . . . . . . . . . . . . . . . . . . . 213
4.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
CHAPTER 5
Bank Structure and Regulation: UK, USA, Japan, EU 221
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
5.2 Bank Structure and Regulation in the UK . . . . . . . . . . . . . . . . . . . . . 222
5.3 Bank Structure and Regulation in the USA . . . . . . . . . . . . . . . . . . . . 242
5.4 Bank Structure and Regulation in Japan . . . . . . . . . . . . . . . . . . . . . . 258
5.5 Bank Structure and Regulation in the EU . . . . . . . . . . . . . . . . . . . . . 262
5.6 Conclusions: Structure and Regulation of Banks . . . . . . . . . . . . . . . . 285
CHAPTER 6
Banking in Emerging Economies 287
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
6.2 Financial Repression and Evolving Financial Systems . . . . . . . . . . . . 288
6.3 Banking Reforms in Russia, China and India . . . . . . . . . . . . . . . . . . . 293
6.4 Islamic Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322
6.5 Sovereign and Political Risk Analysis . . . . . . . . . . . . . . . . . . . . . . . . 332
6.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
CHAPTER 7
Bank Failures 351
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
7.2 Bank Failure – Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
7.3 Case Studies on Bank Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358
7.4 The Determinants of Bank Failure: A Qualitative Review . . . . . . . . . . . 390
7.5 Bank Failure: Quantitative Models . . . . . . . . . . . . . . . . . . . . . . . . . . 399
7.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405
CHAPTER 8
Financial Crises 407
8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407
8.2 Definitions and Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407
8.3 The South East Asian Financial Crisis, 1997–99 . . . . . . . . . . . . . . . . 415
8.4 The Japanese Banking Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
8.5 Scandinavian Banking Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
8.6 Long Term Capital Management (LTCM) . . . . . . . . . . . . . . . . . . . . . 454
8.7 Lender of Last Resort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
8.8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466
Appendix 8.1 Japanese Financial Reforms (Big Bang, 1996) . . . . . . . . 467
Appendix 8.2 Reform of the Regulators . . . . . . . . . . . . . . . . . . . . . . 470
CHAPTER 9
Competitive Issues in Banking 473
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473
9.2 Measuring Bank Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473
9.3 X-efficiency, Scale Economies and Scope Economies . . . . . . . . . . . . 477
9.4 Empirical Models of Competition in Banking . . . . . . . . . . . . . . . . . . . 494
9.5 Consolidation in the Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . 517
9.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
CHAPTER 10
Case Studies 541
10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541
10.2 Goldman Sachs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560
10.3 Kidder Peabody Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564
10.4 From Sakura to Sumitomo Mitsui Financial Group . . . . . . . . . . . . . . . 570
10.5 Bancomer: A Study of an Emerging Market Bank . . . . . . . . . . . . . . . 582
10.6 Cre´ dit Lyonnais . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595
10.7 Continental Illinois Bank and Trust Company . . . . . . . . . . . . . . . . . . 617
10.8 Bankers Trust: From a Commercial/Investment Bank to Takeover by
Deutsche Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631