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

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.

Redesigning capital adequacy requirements in another reform of the Basel Accord would be insufficient to contain systemic risk: microeconomic best practice does not ensure systemic stability. At the same time, the classical distinction between insolvency (of highly leveraged institutions) and (global) illiquidity is increasingly blurred, considering that fragile balance sheets of large financial institutions involve systemic risk due to disorderly unwinding of exposures.

    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

    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
    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

    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