Back to Main Story:Playing the regulatory compliance game – or going out of business
The Commission recommended the following five key policy reforms in its report:
- Regulation needs to be formally more countercyclical, to offset the endogeneity of risk that arises from the credit cycle. Capital requirements, leverage ratios, maximum loan-to-value ratios must be tightened in the boom and loosened in the crash within a rule-based framework.
- Risk-taking must be matched to risk capacity for the financial system to be resilient. One way to achieve this is through capital requirements for maturity mismatches (administered in a manner to avoid procyclicality).
- Regulators must have the flexibility to apply tighter regulatory requirements on systemic institutions, instruments and markets. Regular system-wide stress tests should help to identify what is systemic.
- Greater emphasis must be placed on host country regulation within a more legitimate system of international cooperation. Host country regulators must be able to require foreign and domestic banks alike to keep local capital against local risks. Accountable global institutions should coordinate host country regulations, share information and lessons in order to improve regulatory effectiveness and limit regulatory arbitrage, and regulate market infrastructure for global markets such as single clearing and settlement houses. They should also be engaged in capacity building for countries with less developed financial systems.
- Incentives for the financial sector and for financial firms to grow in size and influence, and to concentrate on short-term activity, must be offset, perhaps through additional capital requirements for large institutions and financial transaction taxes.