Wednesday, December 2, 2009

Formal remedies from redesigned infrastructures

Liquidity, said the Central Bank of Luxembourg, must be monitored more closely and procyclical behavior must be mitigated more effectively. The Central Bank of Norway has suggested that requirements should be established stipulating the proportion of liquid assets that a bank must hold, as well as minimum requirements for funding stability.

The Bank for International Settlements has proposed that central counterparties be established in market sectors characterized by a "web of bilateral exposures," while derivatives should be traded on organized exchanges in order to create "more resilient market structures."

"Preventive measures" by supervisors, according to the International Monetary Fund, should consider an expansion of regulatory control, as well as an increase in bank capital requirements and liquidity buffers. Notably, "Addressing cross-border resolution issues remains one of the greatest challenges."

The Swiss National Bank is in agreement that new liquidity regulations should be established. Even more importantly, the Bank believes that finding a solution to the "too big to fail" and "too big to rescue" issues, though critically important, will probably depend in the short run on bilateral agreements which result in "reciprocal recognition recognition of national regulations that are mutually compatible and the associated adjustment of structures and processes."

Identification of "emerging risks that are systemically important" is of paramount importance to the 110 regulatory members of IOSCO, to the extent that members may have to manage potential threats "even beyond the current perimeter of regulation."

There is, as yet, no agreement on the form of multinational structure needed to prevent a recurrence of the events which led to the Crisis. The Norwegian Central Bank has argued that the IMF be appointed as the global systemic regulator, a nomination which the IMF appears unwilling to accept and the Deutsche Bundesbank has specifically rejected. The German central bank and others prefer to operate within the economically weighted bounds of the G-20, as result of concerns by large bank supervisors regarding "the allocation of quotas and voting rights in the IMF, as well as the representation in its decision-making bodies."

Differences of opinion with respect to international frameworks are likely to be shadowed by active disputes within the sovereign political structures of central banks, since new legislation will generally be required to precede regulatory reform at both the national and international levels. The US Federal Reserve has called upon Congress to "act to fix gaps and weaknesses in the structure of the regulatory system and, in so doing, address the very serious problem posed by firms perceived as 'too big to fail.'"  The Fed has called for three principles to guide new legislation: systemic risk-contributors must be regulated; taxpayers must be protected from systemic risks; and, emerging risks must be monitored.