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Symposium 2008

Solution for Strengthening the Global Financial System

The Challenge

The repeated reoccurrence of financial crises since the early 1990s has led to calls for institutional reform. The most recent example is the crisis that began with the problems on the subprime segm ...

The repeated reoccurrence of financial crises since the early 1990s has led to calls for institutional reform. The most recent example is the crisis that began with the problems on the subprime segment of the US housing market. Numerous commentators have observed that the interactions between commercial banks, other financial intermediaries, credit rating agencies, financial regulators, national banks and governments were partly responsible for the financial unrest. There is a need for better management and regulation of diverse, interrelated risks.

Enhance transparency by standardization of complex financial contracts and shifting the trading of derivatives onto regulated exchanges.

Consensus to improve transparency and accountability has routinely been reached after every financial crisis. But since the financial system is evolving continuously, the battle is never over. As the system generates new complexity and obscurity over time, regulation and supervision need to evolve accordingly. Yet transparency is required to help restore market confidence, notably in the market for derivatives such as credit default swaps.

Standardized contracts would reduce complexity and uncertainty. The development of exchange-based trading (as opposed to over-the-counter trading) should be encouraged since this is conducive to standardization, more liquid markets and greater ease of pricing avoiding large counterparty or trading positions on the balance sheets of banks.

Regulators should devise new methods to improve the quality of disclosure. For example, the Senior Supervisors Group has proposed a template for this purpose, but there has been little momentum to follow through on this initiative for large numbers of systemically relevant financial institutions.

    Related Solutions

    Solution
    Symposium 2008

    Strengthen regulation and supervision of all systemically relevant financial institutions – both in the banking and shadow-banking sectors – but avoid regulatory overkill by focusing on simple rules on capital ...

    Strengthen regulation and supervision of all systemically relevant financial institutions – both in the banking and shadow-banking sectors – but avoid regulatory overkill by focusing on simple rul ...

    Strengthen regulation and supervision of all systemically relevant financial institutions – both in the banking and shadow-banking sectors – but avoid regulatory overkill by focusing on simple rules on capital adequacy.

    Polity
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    Symposium 2008

    Make bailouts come at a cost; tougher supervision and tighter capital standards are the price financial institutions have to pay for official rescue operations meant to stem systemic risk.

    Make bailouts come at a cost; tougher supervision and tighter capital standards are the price financial institutions have to pay for official rescue operations meant to stem systemic risk.

    Make bailouts come at a cost; tougher supervision and tighter capital standards are the price financial institutions have to pay for official rescue operations meant to stem systemic risk.

    Polity, Civil Society
    Solution
    Symposium 2008

    Address the procyclicality of the financial and regulatory system by adjusting mark-to-market accounting and by introducing flexible capital adequacy requirements.

    Address the procyclicality of the financial and regulatory system by adjusting mark-to-market accounting and by introducing flexible capital adequacy requirements.

    Address the procyclicality of the financial and regulatory system by adjusting mark-to-market accounting and by introducing flexible capital adequacy requirements.

    Polity, Business
    Solution
    Symposium 2008

    Eliminate conflicts of interest and promote competition in the credit rating market.

    Eliminate conflicts of interest and promote competition in the credit rating market.

    Eliminate conflicts of interest and promote competition in the credit rating market.

    Polity, Business
    Solution
    Symposium 2008

    Replace the Basel II accord, in order to ensure systemic stability by factoring both illiquidity and insolvency risks into capital adequacy requirements and to deprive credit rating agencies of their ...

    Replace the Basel II accord, in order to ensure systemic stability by factoring both illiquidity and insolvency risks into capital adequacy requirements and to deprive credit rating agencies of their ...

    Replace the Basel II accord, in order to ensure systemic stability by factoring both illiquidity and insolvency risks into capital adequacy requirements and to deprive credit rating agencies of their regulatory influence.

    Polity, Business
    Solution
    Symposium 2008

    Gear monetary policy towards price stability first and foremost but, to avoid asset price bubbles, leave open the possibility of “leaning against the wind.”

    Gear monetary policy towards price stability first and foremost but, to avoid asset price bubbles, leave open the possibility of “leaning against the wind.”

    Gear monetary policy towards price stability first and foremost but, to avoid asset price bubbles, leave open the possibility of “leaning against the wind.”

    Polity