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International Financial Regulatory Reforms: Are We on the Right Track? Patrick Leblond

International Financial Regulatory Reforms: Are We on the Right Track? Patrick Leblond. CERIUM Summer School June 30, 2010. Paul Zanetti, Australia. Session Plan. Introduction Financial regulation: the basics The G20 process: where are we? Conclusion. Introduction.

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International Financial Regulatory Reforms: Are We on the Right Track? Patrick Leblond

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  1. International Financial Regulatory Reforms: Are We on the Right Track?Patrick Leblond CERIUM Summer School June 30, 2010

  2. Paul Zanetti, Australia

  3. Session Plan • Introduction • Financial regulation: the basics • The G20 process: where are we? • Conclusion

  4. Introduction

  5. The value of bank assets was falling quickly… Source: IMF, Canada 2009 Article IV Consultation, Staff Report

  6. …while banks had a lot of debt Source: Bank of Canada, Financial Stability Report, December 2008, p. 24.

  7. So, banks did not want to lend money to each other anymore Source: Bank of Canada

  8. Governments had to intervene http://topforeignstocks.com/2009/10/20/government-bailout-of-banks-as-a-percentage-of-gdp/

  9. Financial Regulation:The Basics

  10. Basic Principles • Equilibrium between • System stability and security • Risk taking • Competition is necessary for risk taking • Benefits must be superior to costs • International trade in financial services must not be impeded • No discrimination • International coordination is a must

  11. John Cole -- The Scranton Times, 1 April 2008

  12. What are the financial risks that must be regulated? • Liquidity risk • Run on the bank • Systemic risk • Contagion • Credit freeze • Moral hazard • Capitalism for the gains, socialism for the losses

  13. What are the solutions? • Liquidity risk • Minimum liquidity reserves • Deposit insurance • Central bank credit • Systemic risk • Minimum capital ratios • Leverage ceiling for all financial activities • Limits on asset riskiness • Stress tests • Bankuptcy (resolution) regime for banks • Moral Hazard • No implicit guaranteed bailouts

  14. International Regulation • International coordination of rules and standards • Financial Stability Board • Basel Committee on Banking Supervision • IOSCO • IASB • IMF • National implementation of those rules and standards

  15. Source : Davies and Green (2008, p. 33)

  16. The G20 Process: Where Are We?

  17. What has been proposed (1) • Bank tax • On bankers’ bonuses • On banks’ profits • On financial transactions • Higher minimum capital ratios (capital to assets) • Ratio levels? • Risk weights? • Definition of capital? • Countercyclical? • Maximum leverage ratio (assets to capital) • On what activities? • No weighting of assets according to risk

  18. What has been proposed (2) • Separate investment banking activities from commercial banking activities • Contingent capital • Clearing mechanism for financial derivatives • Regulation of hedge funds • Regulation of credit-rating agencies • Systemic stress-testing with disclosure • Harmonized accounting standards

  19. What is for sure to be there internationally • Minimum liquidity ratios • Higher minimum capital ratios • Leverage ratio • But to all financial activities? • Stress-testing with public disclosure • Large multinational financial institutions • National level • Harmonized accounting standards • Fair value everywhere?

  20. Example of Capital Ratio

  21. What might be missing? • Who assesses the riskiness of assets and liabilities? • Supervision of multinational banks • Who supervises what? • Bankruptcy mechanism for multinational financial institutions • Countercyclical (i.e. dynamic) policies to prick asset bubbles • Make borrowing more expensive as risk increases • Global stress-testing? • Monitoring of national implementation • Sanctions?

  22. Conclusion

  23. Conclusions • The global financial crisis showed that the existing financial regulatory regime does not work • We cannot rely on markets to regulate themselves • Let the G20 process run its course • It is on the right track • Seoul will be the key meeting • New regulatory standards will come in to play starting in 2012 • But the devil will be in the details and national implementation • Will it be enough to prevent the next crisis? • Probably not • Hopefully, it will be less acute and spread out

  24. My Contact Information • University of Ottawa • Graduate School of Public and International Affairs • 55 Laurier Street East, Office 11154 • Ottawa, ON K1N 6N5 • Canada • Tel: +1 613 562 5800 (ext. 2953) • E-mail: pleblond@uottawa.ca

  25. THANK YOU!

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