Speeches and Papers

Reforming Financial Regulation, Supervision, and Oversight: What to Do and Who Should Do It

by Morris Goldstein, Peterson Institute for International Economics

Article on VoxEU.org
February 24, 2009

© VoxEU.org

 


In the midst of the most serious financial and economic crisis since the Great Depression, it is clear that major regulatory failure (in the long run-up to the crisis) was one of the key contributing factors. The two central questions are:

In what follows, I offer a summary of my recommendations.1

It is useful to group the proposed reforms under the seven headings that correspond to problem areas highlighted by the current crisis: (i) reducing leverage and increasing liquidity, (ii) counteracting the pro-cyclicality of bank capital regulation, (iii) pricking asset-price bubbles, (iv) making financial failures less costly, (v) improving market incentives for prudent behavior, (vi) filling gaps in regulatory coverage, and (vii) early warning and monitoring.


Reducing leverage and increasing liquidity


Counteracting pro-cyclicality in the bank capital regime


Pricking asset-price bubbles before they collapse


Making financial failures less costly


Improving market incentives for more prudent behavior


Filling gaps in financial regulation coverage


Early warning and monitoring


Who should do what?

If the framework for regulation, supervision, and oversight is to be strengthened—at both the national and international levels—there will be plenty of work to do for the IMF, the FSF, international standard-setting bodies, and national regulators and supervisors. Below, I sketch out some thoughts on their assignments. I believe that the case for establishing a new super international regulator is weak—both because there is not the political will to cede the requisite authority to such a new institution and because—if reformed properly—the network of existing institutions can do the job.

The IMF

The FSF

The international standard-setting bodies (BCBS, IOSCO, etc)

National regulators and supervisors


References

Brunnermeier, Markus, Andrew Crockett, Charles Goodhart, Avinash Persaud, and Hyun Shin, 2009, "Fundamental Principles of Financial Regulation," Geneva Reports on the World Economy, January 11, 2009.

Goldstein, Morris, 2008a, "A Proposal to Improve Banks' Regulatory Liquidity," Financial Times, May 22, 2008.

Goldstein, Morris 2008b, "A Ten Plank Program for Financial Regulatory Reform," [pdf] Peterson Institute for International Economics, Washington, DC, December 2008.

Goldstein, Morris and Philip Turner, 2004, Controlling Currency Mismatches in Emerging Markets, Institute for International Economics, Washington, DC, 2004.

Group of Thirty, 2008, "Financial Reform: A Framework for Financial Stability," Group of Thirty, 2008.

Philippon, Thomas, 2009, "An Overview of Proposals to Fix the Financial System," Vox.EU.org., February 15, 2009.

US Treasury Department, 2008, "Blueprint for a Modernized Financial Regulatory System, US Treasury, Washington, DC, March 2008.


Notes

1. My column is complementary to Phillipon (2009) but covers a wider range of proposals and pays more attention to some broader institutional issues. For a fuller discussion, see Goldstein (2008b); this expands upon the ten recommendations made at a lecture at the Peterson Institute in February 2008.

2. See Brunnermeier et al. (2009) for various mechanisms aimed at achieving this objective.

3. For some specific recommendations on how to reduce currency mismatching in emerging economies, see Goldstein and Turner (2004).

4. I am indebted to Sir Andrew Crockett for this suggestion.



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