Regulatory lessons from the crisis by ProQuest


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									                                                                       I n t E R n At I O n A l P E R S P E C t I v E

      lessons from
        the crisis
              Collectively, regulators have much to be modest
                  about in terms of their preparation for and
            handling of the GFC. And now, there are some
                     worrying signs that while reforms to
             regulatory architectures are unlikely to go
               far enough, reforms to standards and
                            practices may go too far.

                              JEFFrEy CArmIChAEl AO SF Fin is Chief Executive Officer of Promontory
                              Financial Group Australasia based in Singapore and Sydney. He was formerly the
                              Inaugural Chairman of the Australian Prudential Regulation Authority and a member
                              of the Financial System Inquiry (Wallis Committee).


The magazine for Finsia members                                              december 2009 INFINANCE                    
    I n t E R n At I O n A l P E R S P E C t I v E

             ThE rECENT globAl FINANCIAl CrIsIs (GFC)                     while at the same time tolerating large gaps in the
             has provided a test of both regulatory practices and         regulatory framework (for example, many of the
             regulatory architectures. At this stage, the general         largest market participants, such as hedge funds,
             consensus is that no single factor ‘caused’ the crisis.      are unregulated, and some of the most innovative,
             Rather, a combination of poor government policies,           such as investment banks, are regulated voluntarily).
             deterioration in lending standards, deterioration in              there can be little dispute that heavy
             credit rating standards, inadequate modelling of risk,       fragmentation and competitive regulation in the
             greed, an absence of due diligence by investors, and         United States contributed to both the emergence
             benign neglect by regulators all contributed to what         of the GFC and its severity. Under this architecture:
             might be described as a ‘perfect financial storm’.           l   Banks were able to shift risky assets off balance
                  this article focuses on the role that regulation            sheet into unregulated or under-regulated
             played and some of the lessons from the crisis,                  affiliates.
             particularly the importance of both a sound
             architecture and sound regulatory practices.                 l   the shadow banking system was able to emerge
                  the GFC highlighted many shortcomings in                    as a direct and lower-cost alternative to the
             current international financial regulatory practices,            regulated banking system.
             including failures to:                                       l   Critical parts of the mortgage lending process
             l   fully understand liquidity risk;                             were unregulated.
             l   regulate the shadow banking sector;                      l   Regulatory arbitrage enabled financial institutions
                                                                              to choose the regulator that best suited their
             l   adequately r
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