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Regulators’ Response: Crisis Framework by John Bovenzi

This article discusses the key factors leading to the financial crisis, including the erosion of regulatory standards and structural weaknesses. It examines today's policy agenda, which focuses on strengthening supervision and regulation, addressing systemic risk, and enhancing market discipline. Looking forward, the article acknowledges that financial crises will remain a fact of life and emphasizes the need for regulators to have sufficient authority and flexibility to deal with these events.

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Regulators’ Response: Crisis Framework by John Bovenzi

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  1. Regulators’ Response: Crisis FrameworkbyJohn Bovenzi Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

  2. Table of Contents • Key Factors Leading to the Crisis • Erosion of regulatory standards • Structural weaknesses • Today’s Policy Agenda • Strengthen supervision and regulation • Address systemic risk • Looking Forward

  3. Key Factors Leading to the Crisis: Erosion of Regulatory Standards • Weak Capital Standards/High Leverage • Amounts, quality and cyclicality of capital • Weak Liquidity Standards • High levels of uninsured short-term funding susceptible to panic • Deposit insurance is a necessary, but not a sufficient condition • Weak Underwriting Standards • Low down payments, weak documentation, etc. fuel excessive lending and housing bubble • Consumer, business and government debt levels • Fuels boom-to-bust cycles

  4. Key Factors Leading to the Crisis: Structural Weaknesses • Complexity, Lack of Transparency • Lack of trust contributes to panic • Inability to differentiate between institutions • New market instruments contribute to the downward spiral in the value of collateral once the bubble bursts • Gaps in Financial Regulatory Oversight • Shadow banking system – MMMFs, SIVs, etc. • Interdependencies/Systemic risk

  5. Today’s Policy Agenda (1) • Strengthen Bank Supervision/Regulation • Capital standards, Liquidity standards • Volcker rule • Consumer/Investor protection • Address Systemic Risk • Systemic risk regulator • Higher regulatory standards for SIFIs • Develop effective bank resolution mechanisms • Better cross border coordination • Central clearing houses for OTC derivatives

  6. Today’s Policy Agenda (2) • Enhance Market Discipline • Greater transparency • End Too-Big-To-Fail • Housing Reform? • Government support for Fannie/Freddie • Loan Modifications/ Foreclosures

  7. Looking Forward • We are at the early stages of financial reform implementation – unclear whether long-term or short-term perspectives will prevail • There will be many unintended consequences as reform measures are implemented • One likely result will be a smaller, more expensive, financial system • Financial crises will remain a fact of life • Regulators will need sufficient authority and flexibility to deal with these events

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