You are here: Home Knowledge Base Economy Strengthening the Global Financial System Solutions 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 ...
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.

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.

Financial institutions above a certain threshold size should be required to meet “basic disclosure requirements.” Capital requirements for risky and complex exposures have to be reviewed and probably raised. This should pertain to the systemically relevant financial institutions not just to the banking sector, but also in the “shadow banking” sector (which includes money market funds, hedge funds and financial insurers) across all the relevant countries. International cooperation should help enforce best practice and prevent regulatory arbitrage.

But regulatory overkill should be avoided to prevent financial innovation being stifled altogether. This calls for relatively simple rules and regulations such as clear minimum capital-asset ratios combined with higher risk capital requirements for proprietary trading positions and for hedge funds, recognizing the operational risk they are running.

As supervisory authorities do not currently have responsibility for promoting the stability of the financial system as a whole, macro-prudential supervision should be explored further, with a view to enabling supervisory authorities to join fiscal authorities and central banks in providing safeguards against financial distress.

    Related Solutions

    Solution
    Symposium 2008

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

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

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

    Polity, Business
    Solution
    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