You are here: Home Knowledge Base Economy Strengthening the Global Financial System Solutions Address the procyclicality of the financial and regulatory system by adjusting mark-to-market accounting and by introducing flexible capital adequacy requirements.
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.

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

While current mark-to-market accounting clearly exacerbates the cycle, simply suspending it when crisis looms is not the solution. But limiting mark-to-market accounting to assets and liabilities with a short term of, say, less than a year, may provide a reasonable option.

Minimum capital-asset ratios should be raised during boom periods and relaxed in a slump. Specifically, to moderate excessive bank lending during a boom and encourage the build-up of reserves, regulatory capital adequacy requirements might be raised to the extent that the growth in bank asset values exceeds a predetermined level. This approach has numerous practical complications, but then so does the central bankers´ task of setting interest rates today to control inflation in 18 months time.

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    Symposium 2008

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

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

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    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 ...

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    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.

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

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    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 ...

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    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.”

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

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