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Do financial markets need more regulation ?

Do financial markets need more regulation ?. Introduction. Definition «  Process of authorising , regulating and supervising financial markets and financial institutions themselves  » Davis & Green Why regulate ?

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Do financial markets need more regulation ?

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  1. Do financialmarketsneed more regulation ?

  2. Introduction Definition « Process of authorising, regulating and supervisingfinancialmarkets and financial institutions themselves » Davis & Green Whyregulate? • Financial markets have becomebigger/ + complex/ + inter/ + concentrated • Banks & FI : Big part of the real economy • Possible dysfunction of the financial system • Externalitescaused by financialactivities Objectives of financialregulation • Improve information • Promotefinancialstability (systemicrisk) • Maintain or enhancecompetitiveness of the financialsector

  3. Regulationtoday Regulators International G20 / WB / IMF / WTO … In Europe • ECB • EuropeanSupervisoryAgencies • EuropeanbankingAuthority • European Securities & MarketsAuthority • Europeaninsurance and occupational pensions authority • Financial stabilityboard

  4. Regulationtoday Regulators In USA • Fed • State authorities • FederalDepositInsurance Corporation • Officeof the Comptroller of the Currency

  5. Regulationtoday Regulationacts LamfalussyProcedures  To design the rules of the EU financialsector Dodd-Franck Act (July 2010) – USA : • Promotestability • Increasetransparency and accountability in financialsector • Prevent bail-outswith public money and end « toobig to fail » • Protectconsumersagainstbankfailures & abusive practices Vickers recommandations – UK  Intended to minimise risk of creditcrunch

  6. Regulationtoday Regulationacts Basel I Set harmonised K ratio for the stability of the banking system Basel II • Improve minimum K requirements • Supervision • Transparencyand marketdisclosure Basel III • Improveloss & shockabsorption capacity • Improverisk management and governance • Strengthenbanks’ transparency& disclosure

  7. Crisis : A lack of regulation ? Lot of causes • Macroecofactors:loose mo po & global financialimbalancescausing large K inflows • Multiple failures by many FI • Excessive leverage ratio to grow balance sheet & generate business volumes • Excessive recourse to wholesale & short termfunding & insuficient focus on liquidityrisks • Insufficient K levels • Uncontrolledsecuritisation • Lack of transparency & use of off-balance sheet techniques • Governancefailures • Mistakes by « surveillance agents » : rating agencies/audit firm • Inadequateregulatoryframework of banks & shadowbanking

  8. More or lessregulation? This is not really about the level of regulation, This is more about the structure of the financial system itself

  9. More or lessregulation? LEVEL OF REGULATION : More ?

  10. More or lessregulation? LEVEL OF REGULATION : Less ? • Law of profits & speculation : More money • The system can’tregulateitself: Crisis! • Hugecost of regulation • Ex : Separation of deposit banks and Investment banks • Regulation is not homogeneous

  11. More or lessregulation? THE STRUCTURE OF THE FINANCIAL SYSTEM • Dematerialisation of financialoperations : they are not aimedat the real economy • Disequilibriumbetweenvirtualeconomy and real economy • Regulation & supervision not adapted • Uniformisaition of behaviours vs diversity of institutions • Toomuch concentration of banks & interdependence • Sectors not regulated : hedgefunds & securitisation- Paradox • The depositbanks and Investmentbanks are not separated • Size and power of banking lobbies : Block the reinforcement of regulationauthorities • Conflict of interests : Rating agencies • Seriousethical lapses : fraud/ defaults … • Lack of coordination at an international / Europeanlevel

  12. To conclude General Trend : More regulation French trend : a willingness to change with the Moscovici law The marketis not an end in itself but the best way to reacheconomicefficiency, only if the marketisregulatedin the public interest. In order to accomplishthis, weneed a system « based on commonsense, courage and imagination to serve social justice & wealthcreation » * ratherthan on new regulationrules. We are in a consumer society where « only the power of money isrecognised » * Maria Nowak, l’Espoir économique

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