Global Policymakers Urged To Stay Committed To International Reform Program
In a recent statement to the leaders of the G20 nations, the Systemic Risk Council, a group of distinguished former regulators and academics, urged policymakers to remain committed to the international program for financial reform that was developed in the aftermath of the recent financial crisis.
Comprised of five pillars--higher and better quality bank capital, reduced bank liquidity exposures, a system-wide regulatory focus, central clearing of standardized derivatives, and resolution of firms without taxpayer bailouts--the reform program is intended to establish international minimum standards that serve as a precondition for market participants to access international markets.
According to the statement, the current global macroeconomic environment of high debt and slow growth, together with a limited macroeconomic arsenal of central banks and fiscal authorities, makes a rollback of the international reform program particularly perilous. Such rollback, the SRC statement notes, would jeopardize the welfare of citizens and, in effect, open the door to additional taxpayer-funded bailouts. The statement encourages policymakers to not only preserve but complete the unfinished work in each pillar.
Beyond supporting the reform program, the SRC urges consideration of tougher policies, including higher bank capital requirements, particularly while debt levels are reduced and the macroeconomic arsenal is replenished. The statement also encourages the Basel Committee to steer a steady course to reduce banks' reliance on internal risk models to derive risk weights. Such models have been criticized by several commentators for allowing banks to skirt capital requirements.
Another area of concern for the SRC is "shadow banking." The SRC warns that additional requirements on the formal banking sector will push activity out of banks and into nonbanks. While some of this migration may be stability enhancing, some banking activity will migrate to nonbanks that replicate bank-like fragility through leverage and liquidity mismatches. The statement urges policymakers to take a renewed interest in developing a regime to better regulate shadow banking activities and entities that represent a risk to financial stability.
Finally, the statement notes that in the aftermath of the crisis key jurisdictions adopted domestic financial stability bodies to gain a system-wide view of stability policy. These bodies were intended not just as a forum for exchanging views, but were vested with significant powers to allow them to mitigate threats to financial stability. The SRC recommends that such bodies and their powers be preserved to ensure regulators a continued system-wide perspective and to allow regulators to address future threats to financial stability.
The statement concludes by saying:
“The resilience of national financial systems is a vital good, essential for citizens to live decent lives. It is necessary for individuals, families, businesses, and entrepreneurs to be able to plan for the future, transact with each other, and commit their savings to new ventures. Such, however, is the interconnectedness of today’s world that no country can make its own system resilient without cooperation from its peers. In a nutshell, the resilience of the international financial system is a common global good, for which the G20 authorities are, in effect, joint trustees. By so doing, they act in their national interests.”
About the SRC:
The Systemic Risk Council is a private sector, non-partisan body of former government officials and financial and legal experts committed to addressing regulatory and structural issues relating to global systemic risk, with a particular focus on the United States and Europe.
The SRC is chaired by Sir Paul Tucker and includes Volcker Alliance founder, Paul Volcker, as well as Alliance board members, Sheila Bair, Bill Bradley, William Donaldson, and Alice Rivlin.
