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Symposium 2009

Balancing Risk Taking and Financial Regulation

The Challenge

Many observers blame excessive risk taking and inadequate regulation as the core causes of the current global financial crisis that we have been witnessing.

Consequently, in the aftermath of the massive efforts by governments to rescue financial firms that were hard hit by the global crisis, the re-regulation of global finance has surfaced in many of the comments or policy proposals made by policymakers, the academic as well as business communities.

While such sort of reaction is to be expected, it raises several questions.

    • First, how far should re-regulation of global finance go without stifling healthy risk-taking and finan-cial innovation (e.g., securitized mortgages, securitized credits)?
    • Second, should tighter regulation be across-the-board or case by case? Should regulation be tai-lored to specific financial products (mortgages, credit card loans, secured vs. unsecured debt etc.) or financial industry (commercial banks, investment banks, hedge funds etc.)?
    • Third, which regulatory instruments require multilateral coordination? For example, is it sensible to have a single standard for minimum capital requirements or deposit insurance scheme for interna-tionally active banks?
    • Fourth, how can regulators give the right incentives for bank stakeholders (investors and creditors) to be active in monitoring risk taking by banks, and thereby reducing the risks of credit defaults?
    • Finally, how should regulators push for more transparency of banks’ exposure to risk, without com-promising the confidentiality of banks’ risk control strategies?

    Solutions

    Solution
    Symposium 2009

    Consider the creation of “solvency-convertible debt” for systemically relevant financial institutions, ensuring that if such institutions become insolvent, their debt would automatically be converted into equity, on predetermined terms.

    Consider the creation of “solvency-convertible debt” for systemically relevant financial institutions, ensuring that if such institutions become insolvent, their debt would automatically be conver ...

    Consider the creation of “solvency-convertible debt” for systemically relevant financial institutions, ensuring that if such institutions become insolvent, their debt would automatically be converted into equity, on predetermined terms.

    Polity, Business
    Solution
    Symposium 2009

    Create an internationally harmonized and countercyclical set of capital requirements for financial institutions.

    Create an internationally harmonized and countercyclical set of capital requirements for financial institutions.

    Create an internationally harmonized and countercyclical set of capital requirements for financial institutions.

    Polity, Business
    Solution
    Symposium 2009

    Create new retail financial instruments to insure consumers against risks, such as home equity insurance and house price futures.

    Create new retail financial instruments to insure consumers against risks, such as home equity insurance and house price futures.

    Create new retail financial instruments to insure consumers against risks, such as home equity insurance and house price futures.

    Business, Civil Society
    Solution
    Symposium 2009

    Introduce incentives for “patient capital,” giving more voting rights to investors who commit themselves to companies for longer periods.

    Introduce incentives for “patient capital,” giving more voting rights to investors who commit themselves to companies for longer periods.

    Introduce incentives for “patient capital,” giving more voting rights to investors who commit themselves to companies for longer periods.

    Polity, Business
    Solution
    Symposium 2009

    Establish an European Deposit Insurance Agency to insure deposits in banks.

    Establish an European Deposit Insurance Agency to insure deposits in banks.

    Establish an European Deposit Insurance Agency to insure deposits in banks.

    Polity, Business
    Solution
    Symposium 2009

    Consider establishing an institution with the power to approve or reject new financial products in accordance with their forecast systemic risks

    Consider establishing an institution with the power to approve or reject new financial products in accordance with their forecast systemic risks

    Consider establishing an institution with the power to approve or reject new financial products in accordance with their forecast systemic risks

    Polity, Business

    Proposals

    Proposal
    Symposium 2009

    Using Insurance as an Alternative to the Bad Bank

    The Current Situation In spite of the German Special Fund Financial Market Stabilization (SoFFin) guarantees extended to German banks to refinance them (not to mention the measures taken to increase t ...

    The Current Situation In spite of the German Special Fund Financial Market Stabilization (SoFFin) guarantees extended to German banks to refinance them (not to mention the measures taken to increase tier 1 capital), German banks are becoming increasingly reluctant to lend money, and this reluctance, together with the downturn in the economy, is putting a great strain on the German economy. One of the main reasons for this is that there are types of assets in banks’ nontrading portfolios (less so in their trading portfolios) that are increasingly tying up capital as ratings are lowered. “Rating migration” will continue to

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2009

    Balancing Risk-Taking and Financial Regulation - Solutions

    There is no doubt that the current global financial crisis is a result of excessive risk taking in financial markets. Banks took much risk and investors were led to buy complex financial products, who ...

    There is no doubt that the current global financial crisis is a result of excessive risk taking in financial markets. Banks took much risk and investors were led to buy complex financial products, whose riskiness was not well understood. Existing regulatory and supervisory institutions have failed to keep pace with the growth of financial engineering that lead to complex products. Moreover, credit rating agencies have failed to detect financial excesses that first appeared in the US sub-prime mortgage market in 2007 and later spread to global markets. It was perplexing that many highly rated mortgage bonds plummeted in value

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2009

    Balancing risk taking and financial regulation

    The root of the current global financial crisis has been excessive risk-taking. A significant underpricing of risk and rising financial leverage made the financial system vulnerable. A general loss of ...

    The root of the current global financial crisis has been excessive risk-taking. A significant underpricing of risk and rising financial leverage made the financial system vulnerable. A general loss of confidence ultimately led to its collapse. The factors that contributed to the global financial crisis are manifold, ranging from microeconomic aspects – in particular, skewed incentives, regulatory weaknesses and an underestimation of risk – to macroeconomic aspects, such as global current account imbalances and a blind belief in the persistence of the “Goldilocks economy”. Initiating reforms now To balance risk-taking and, thus, to enhance the financial system’s resilience it

    Polity
    Proposal
    Symposium 2009

    Balancing Risk Taking and Financial Regulation

    Challenges The financial crisis has, so far, caused losses in the financial sector exceeding USD 1 trillion, wiped away USD 1.2 trillion in the market value of the top-20 financial firms alone and for ...

    Challenges The financial crisis has, so far, caused losses in the financial sector exceeding USD 1 trillion, wiped away USD 1.2 trillion in the market value of the top-20 financial firms alone and forced governments to provide USD 3.6 trillion in funds for rescue measures. It has also triggered the deepest global recession since the end of World War II. Reform of the global financial system is needed and must provide solutions for the following questions: How can we resolve the incompatibility between open, integrated financial markets and the fact that financial regulation, the tools for crisis management and

    Polity, Business
    Proposal
    Symposium 2009

    Solvency-Convertible Bonds and Financial Vigilance Agency

    Require that the debt issued by systemically relevant financial institutions be “solvency-convertible,” so that if such an institution becomes insolvent, the debt would automatically be converted ...

    Require that the debt issued by systemically relevant financial institutions be “solvency-convertible,” so that if such an institution becomes insolvent, the debt would automatically be converted into equity. The size of the debt-for-equity swap should be such as to return the institution to solvency and restore its capital adequacy ratio to the minimum required level. What debt is converted and the terms of the conversion would depend on the seniority of the tranches. This simple measure could ensure that all financial institutions that are ‘too large to fail’ in fact don’t fail. Because as soon as insolvency threatens, enough debt

    Polity, Academia, Business, Civil Society

    Implemen- tations

    Implementation
    Symposium 2009

    Negotiations Basel III

    Polity, Academia, Business, Civil Society
    Implementation
    Symposium 2009

    New control mechanism in EU financial markets

    Polity, Academia, Business, Civil Society
    Implementation
    Symposium 2009

    Contingent convertibles bonds (Coco)

    Polity, Academia, Business, Civil Society