Questions raised over possible systemic risk regulations
Potential regulation of firms that pose a systemic risk to economies must first tackle the issue of how to define an institution that is "too big to fail", according to regulation professionals speaking at the International Centre for Financial Regulation summit in London yesterday.
A representative of the US Securities and Exchange Commission (SEC) suggested that the answer was to increase supervision of firms that pose a systemic risk to an economy, to avoid situations where governments have to bail them out with taxpayers' money, as happened with American International Group in the US and Royal Bank of Scotland in the UK.
"Financial entities that are perceived as being 'too big to fail' have an incentive to take too much risk in the hope of high returns with the belief their governments will always step in if things go badly. They should be regulated to take away this incentive," said Ethiopis Tafara, director of the Office of International Affairs at the SEC.
But creating new rules to achieve this is not a straightforward task: regulators will have to first define the parameters that separate them from normal companies.
"What is a 'too big to fail' institution? And once that is defined, regulators would have to draw up a list of firms that qualify as having systemic risk and a list of those that don't," said Carlo Comporti, secretary-general of the Committee of European Securities Regulators.
One of the potential issues is that it could result in many firms hovering just below the parameters that define them as a systemic risk, and therefore avoiding more regulation, warned Tafara.
Other issues around regulatory reform raised at the conference included the importance of supervisors across the globe making any new significant changes in unison to avoid firms trying to taking advantage of regulatory arbitrage.
Also discussed were possible new countercyclical rules that would build up banks' capital buffers in bull markets and allow this to reduce during recessions.
Recent new reports suggesting reforms to financial regulation include those released in February by the Financial Services Authority's (FSA) chairman Adair Turner and the European Union's High Level Group on Financial Supervision's chair Jacques de Larosière, which covered many of the issues raised at the conference.
See also: SEC official hopes G-20 will establish "broad parameters" for regulation
Bernanke calls for regulatory overhaul of financial system
FSA plans new capital formula for banks
De Larosiere calls for ECB to lead European macro supervision
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Industry calls for major rethink of Basel III rules
Isda AGM: Divergence on implementation suggests rules could be flawed, bankers say
Saudi Arabia poised to become clean netting jurisdiction
Isda AGM: Netting regulation awaiting final approvals from regulators
Japanese megabanks shun internal models as FRTB bites
Isda AGM: All in-scope banks opt for standardised approach to market risk; Nomura eyes IMA in 2025
CFTC chair backs easing of G-Sib surcharge in Basel endgame
Isda AGM: Fed’s proposed surcharge changes could hike client clearing cost by 80%
UK investment firms feeling the heat on prudential rules
Signs firms are falling behind FCA’s expectations on wind-down and liquidity risk management
The American way: a stress-test substitute for Basel’s IRRBB?
Bankers divided over new CCAR scenario designed to bridge supervisory gap exposed by SVB failure
Industry warns CFTC against rushing to regulate AI for trading
Vote on workplan pulled amid calls to avoid duplicating rules from other regulatory agencies
Bank of Communications moves early to meet TLAC requirements
China Construction Bank becomes last China G-Sib to release TLAC plans
Most read
- Top 10 operational risks for 2024
- Top 10 op risks: third parties stoke cyber risk
- Japanese megabanks shun internal models as FRTB bites