The future of regulatory reform: Outcomes from the latest CEPR conference

The Editors 09 November 2010

a

A

CEPR has just held a major conference on financial regulation – The Future of Regulatory Reform – bringing together senior policymakers, leading academics and industry practitioners (the executive summary and accompanying video can be found here). Had this event taken place five years ago, the attendance would have been quite different. But this is 2010, and the room was packed. As one attendee put it, regulation is now sexy.

Why the change in attitude? As the event’s co-organisers, CEPR President Richard Portes and Patricia Jackson, partner at Ernst & Young and board member at CEPR, argue, it is all in the timing. This week, the G20 meet in Seoul to celebrate something of a two year anniversary since their first meeting in Washington DC in the immediate aftermath of the collapse of Lehman Brothers. Firmly on the agenda is regulatory reform, with several items remaining undecided.

In an article on the East Asia Forum, Il Sakong, Chairman of the Presidential Committee for the G20 Summit outlines the agenda, with a key focus on regulation:

“Recently the Basel Committee on Banking Supervision agreed on a new capital framework for banks which will be submitted to the leaders in Seoul for endorsement. I am quite sure that the G20 leaders in Seoul will endorse the new framework. The new framework distinguishes itself from both Basel I and II by including a macro-prudential regulatory aspect.” (Sakong 2010).

For many attending the recent CEPR conference, the G20 meetings and the global crisis in general should not be wasted. They offer a window of opportunity that has never been so wide open. José María Roldán of the Bank of Spain argues that the regulatory sector is by its nature static and the financial industry dynamic. For the first time though, says Jochen Sanio, President of the German financial regulator BaFin, the bank lobbyists are outside the room. “Now”, he asserts, “is the hour of the regulator”.

Yet there are many issues that are far from settled. One of these, outlined by Stijn Claessens of the IMF, is how the Basel recommendations will help policymakers balance the three objectives of global financial stability, keeping cross-border banks, and maintaining national authorities. Claessens argues that policymakers can only achieve two out of these three – what he calls the “financial trilemma” – and it is clear from the last few years which of these three objectives has not been achieved (Claessens and colleagues also discuss this on Vox, see Claessens et al. 2010).

A further concern, voiced by José María Roldán, is that the reforms will leave the system exposed to regulatory arbitrage. While conference attendees were quick to dismiss this becoming a serious issue for most large banks, a less noticed form of arbitrage is between industries. Roldán notes that one of the largest bailouts during the crisis was that of the US insurance giant AIG and that the latest round of reform proposals, for all their new measures, only creates a few aimed at dealing with insurance companies.

This echoes another danger highlighted by the panel: if certain financial services are stopped from going through banks, they may well go elsewhere – an infamous destination being the shadow banking sector. Tobias Adrian of the Federal Reserve Bank of New York argues that the shadow banking sector, while having many members who are out to avoid regulation, also has parts that provide innovation and specialisation necessary for any developed financial system to thrive. Regulation of this sector by function rather than by charter could, Adrian argues, have “caught” some of the harmful behaviour by shadow banks earlier.

Although there was broad consensus at the conference that the Basel III reforms are a step in the right direction, Rafael Repullo of CEMFI and CEPR, was quick to warn that the devil is in the detail. Repullo argues specifically against one of the recommendations: the creation of additional capital buffers, calling it “a bad policy that should be abandoned”. Repullo instead suggests that regulators change the capital requirements according to the economy’s position along the business cycle, arguing this approach is simpler, more transparent, lower cost, and more consistent with how banks currently manage their risk.

Many regulators expressed uncertainty over the consequences of reforms likely to be endorsed at the G20 and at other global meetings. Carol Sargeant of Lloyds Banking Group pictures regulatory changes as pulling a big lever that will affect the system in numerous ways that are impossible to fully predict – a point that was raised throughout the day. To this she adds a warning that the private sector will adapt to any regulation, and cautions that regulators should be careful what they wish for. Solving yesterday’s problems may leave weaknesses for tomorrow’s – or worse, create whole new ones.

These are among the recommendations and issues discussed at the conference. Xavier Freizas of Pompeu Fabra University will be organising CEPR’s next conference on regulation, building on many of these topics and responding to the G20 meeting. By holding such events, the CEPR hopes that policymakers can minimise the risks of storing up trouble for the future.

CEPR will be holding several events on this topic and others later this year and early in 2011, see the CEPR events diary for more details.

Delegates quoted were speaking in their personal capacity and their views do not necessarily reflect those of the organisations to which they are affiliated.

References

Claessens, Stijn, Richard J Herring, Dirk Schoenmaker (2010), “A safer world financial system: Improving the resolution of systemic institutions”, VoxEU.org, 8 July.
Sakong, Il (2010), “The G20 Seoul Summit: Agenda and implications”, East Asia Forum Quarterly, 2 November.
 

a

A

Topics:  Global governance

Tags:  financial regulation, G20, regulatory reform

Editors of Vox

Events

CEPR Policy Research