Financial regulation

 (The former text of this renamed article has been temporarily transferred to my sandbox to facilitate restructuring
Nick Gardner 16:22, 15 January 2010 (UTC))

Background

Following the financial crash of 2008, new measures have been put forward to remedy deficiencies in the existing methods of regulating national financial institutions, and there have been international negotiations concerning the coordination of such measures.

Microprudential policy

Post-crash proposals

Leverage

The Turner Review recommended raising banks' reserve ratio requirements to levels substantially above those required under Basel 2 and introducing a discretionary counter-cyclical element that would raise the required ratio during economic booms . The Warwick Commission on international financial reform was also in favour of counter-cyclical regulation but suggested that it should be rules-based to help central banks to resist political opposition to "taking away the punchbowl when the part gets going". Its purpose would be to persuade banks to put away money during a boom-at a time when they would be motivated to run down their reserves.

Risk management

The de Larosière Group of European regulators proposed that the board members of banks should be required to abandon the practice of relying upon risk models that they do not understand, and to make fuller use of their professional judgment. .

New risk management standards were issued by the Basel Committee on Banking Supervision in September 2008.

Derivatives

The rôle of financial derivatives in the crash of 2008 is a topic of controversy among economists. Professor Hyun Song Shin has argued that their use had undermined the stability of the financial system by concentrated risks in the banking system , and the eminent economist Joseph Stiglitz has sugqested that major banks should not be allowed to hold derivatives, especially credit default swaps, but Professor Myron Scholes has described proposals to ban them as "a luddite response". The regulatory authorities do not appear to be considering a ban on their use, but they are formulating measures to improve their ability to monitor them. The United States Department of the Treasury has proposed legislation to require clearing of all standardized over-the-counter derivatives through regulated central counterparties who must impose robust margin requirements and risk controls , and similar measures are considered in a European Commission consultation paper on possible derivatives legislation that may be expected to be discussed in forthcoming meetings of an international regulators forum

Off-balance-sheet vehicles

The international Financial Stability Board has issued new disclosure standards for off-balance sheet vehicles, and has recommended the imposition of higher capital requirements where appropriate.