Could proper standards in finance and banking have prevented the financial failures?

Transcription

1 Could proper standards in finance and banking have prevented the financial failures? Dr. David S. Gerber Deputy Head of Division, Head of Financial Market Policy Geneva, 1 July 2011

2 Contents 1. Rationale for regulation 2. Process of standard-setting in finance 3. Example: TBTF regulation 4. Conclusion 2

3 1. Rationale for regulation Financial regulation: laws and rules that govern what financial institutions such as banks, brokers and investment companies can do. These rules are generally promulgated by government regulators or international groups to protect investors, maintain orderly markets and promote financial stability. The range of regulatory activities can include setting minimum standards for capital and conduct, making regular inspections, and investigating and prosecuting misconduct. Source: Financial Times Lexicon ( The entire body of rules used by a country to intervene in free competition to rectify market failures or to implement state objectives against competition. But: Balancing act between various regulatory objectives 3

4 1. Rationale for regulation False incentive systems Insufficient transparency Monetary policy Causes of the financial crisis Role of rating agencies Bank leverage ratio Inadequate risk management Starting point for regulatory initiatives 4

5 1. Rationale for regulation Lessons learnt from the financial crisis: areas of international initiatives International cooperation Supervisory colleges International crisis management Compliance with prudential standards Macroprudential supervision Adjustment of financial structures FSB-IMF early warning system Stress tests Rules and supervision Principles for liquidity management Basel III Measures to alleviate pro-cyclicality Closing regulatory gaps Hedge funds, private equity, OTC Rating agencies Remuneration systems Structured products Accounting 5

6 2. International standard-setting Characteristics of international standards Generally accepted principles, practices and guidelines (so-called methodologies) Very heterogeneous, differing degrees of detail Soft law; no binding agreements under international law, but there is (political) pressure for implementation at the national level (conformity tests, blacklists, etc.) Legal, economic and political dimension 6

7 2. International standard-setting International financial structure after the financial crisis Informal grouping International Financial Institutions Standardsetters (selection) Basel Committee 7

8 2. International standard-setting Diverse role of countries in the financial crisis Functions Banker versus bank client Guarantor versus treasurer Economic engine versus competition watchdogs Supervisory authority/regulator versus owners Problems Conflicts of interest Know-how Political influence Effectiveness of measures 8

9 3. Example: TBTF regulation Too big to fail (TBTF) Moral hazard Subsidy / state guarantee Distortion of competition / structural change Risk for taxpayers Too big to be rescued Market is not working in an appropriate manner / unacceptable risks Switzerland Policy mix: capital, organisation, liquidity and risk diversification Preventive and curative effect 9

10 3. Example: TBTF regulation Basel III and Swiss regulation for TBTF financial institutions Capital requirements (in percent of risk-weighted assets) 10

11 4. Conclusion A global financial industry needs international standards International standards represent the central yardstick for national financial market regulation We have to learn regulatory lessons from the financial crisis through new/adapted standards But: International standards represent a political compromise on minimum requirements International standards are based on past experiences and lag behind market developments Each country must gear the implementation of these standards to the national risk profile International standards contribute significantly to reducing the probability and severity of financial crises 11