Banking on Basel: The Future of International Financial Regulation

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BIS chief Jaime Caruana warns that financial stability shouldn’t be taken for granted

There are a number of developments within the credit rating industry that point towards a new phase in its development. There is a concerted effort by the largest agencies to move into the sustainable finance sector, 1 whilst recent policy changes have now opened up the Chinese marketplace to foreign credit rating agencies for the first time. The Financial Conduct Authority's recent fine on Standard Chartered Bank illustrates the importance not only of having appropriate and strong AML policies and procedures for high risk areas of business but also mainly, in fact of adhering to them.

An important principle is the duty of banks to pay due regard to the interests of their customers and to treat them fairly. Following the arrival of Bitcoin in , there has been much hype surrounding cryptocurrency and its underlying mechanism — the so-called distributed ledger technology. Cryptocurrencies are unique instruments in the investment world that have quickly gained popularity as a means of payment and funding in recent years.

Although the legal nature of cryptocurrencies remains somewhat obscure and undefined, with regulators generally taking a wait-and-see approach, many people have claimed cryptocurrencies are the new money. The purpose of this article is therefore to analyse the nature of cryptocurrencies from a money law perspective: do they indeed constitute money and should the ECB issue central bank digital currency CBDC? For due consideration, this article focuses on utility tokens and not on security tokens. Systemic risk has emerged as the most important aspect of financial regulation after the global financial crisis GFC.

Basel III has introduced some measures and tools eg systemic risk buffer, countercyclical buffer, capital conservation buffer and liquidity risk in order to prevent the occurrence of systemic risk. Nevertheless, the effectiveness of these measures in Basel III in adequately addressing the problem of contagious runs that can quickly spread throughout the financial system is questionable. A two-year investigation by the Australian Competition and Consumer Commission has resulted in criminal cartel charges being brought against three international banks and six of their senior executives.

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This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Registered in England and Wales. Number The argument for a proportional approach to accommodate LMICs is even more compelling. The Financial Stability Board and Basel Committee are increasingly aware of the challenges for developing countries and have undertaken some reforms.

Yet these fall far short of what is needed. However, little is known about the nature of participation and quality of dialogue because public summaries of the meetings carry very little information. Little has changed at the Basel Committee. It set up a Task Force on Simplicity and Comparability in , and has implemented some of its recommendations, such as an output floor for risk weight calculations using internal models.

There have been calls for the Basel Committee to build greater proportionality into the design of its standards. Unfortunately, the Basel Committee has not engaged in a revision of the standard in line with Basel III even though developing country comments in consultations consistently emphasised the costs of complexity WB, A recent proposal to simplify the Basel approach to market risk has also been criticised by developing country representatives as still excessively complex BCBS, b.

There is a strong case for designing international standards on a proportional basis so that they can be readily adapted and implemented in a wide variety of jurisdictions. This goal is of vital importance: Lax financial regulatory standards increase the likelihood of a financial crisis both in core and periphery countries, the repercussions of which can wipe out years of development gains. In the wake of the global financial crisis, policy makers around the world called for greater regulatory stringency, including experts that take into account developing country preferences Stiglitz, ; Sundaram, Yet developing countries also need to use financial regulation to pursue inclusive economic development and poverty reduction.

Banking on Basel: The Future of International Financial Regulation by Daniel K. Tarullo

It issued a report the following year that highlights the negative impact of stringent standards on financial inclusion. The GPFI report advocates for a proportionate application of financial standards, taking into account the nature of risk, regulatory capacity and the current level of financial inclusion GPFI, Others in turn have shown greater resistance to any departure from an exclusive focus on financial stability.

Yet, as with international banking standards, while the aims have been laudable, the standards and their implementation have not always reflected the interests of developing countries.


The new standards apply a proportionality principle. In spite of such efforts, many developing countries have experienced the withdrawal of financial services by international banks in the past years. The global financial crisis highlighted the interconnectedness of the financial system and the destabilising role money market funds, monoline insurers and derivatives brokers can play.

Regulators recognised that concentrating on the banking sector alone is insufficient to safeguard the financial system Knight, It coincided with the beginning of G20 work on financial inclusion, but the overlap between the two issue areas was not apparent to policy makers for several years. The FSB concentrated its initial work on the kinds of shadow banking entities and activities that are prevalent in developed economies, such as money market funds, securitisation, and securities financing transactions.

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While such kinds of shadow banking activity are currently concentrated in the world's most developed markets, they deserve equivalent regulatory scrutiny in developing countries. Peer to peer lending and mobile credit services perform similar financial inclusion functions, but they also fall under the FSB's definition of shadow banks. It is important to note that regulators from around the world agree that NBCI that contributes to systemic risk merit as much regulatory scrutiny and containment as its equivalent in the banking sector.

Where the interests of developed and developing countries diverge is in the treatment of NBCI that may not pose systemic risk but benefits domestic economic actors that are underserved by the banking system. Regulators from East Asian developing countries took the lead in voicing their dissatisfaction with the neglect of financial inclusion in the discussion of how shadow banking should be regulated.

The FSB has shown a remarkable unwillingness to engage with this debate. Its shadow banking information sharing exercise and thematic peer review do not entertain any of the arguments advanced by developing countries. The clarification that shadow banking is not intended to cast a pejorative tone is relegated to a footnote. The FSB also does not entertain the idea of a differentiated approach to shadow banking for developing countries. FSB members have not publicly voiced any intention to negotiate a common global standard for shadow banking in the future. The neglect of financial inclusion by the FSB and Basel Committee results in part from their mandates.

While this is of vital importance, there are other important policy objectives relevant to the design and implementation of financial regulations, including financial inclusion and financial sector development.

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At a national level many members of the FSB and Basel Committee have organisational mandates that go beyond financial stability. Promoting the healthy development of the banking sector is among the mandates of both the Chinese central bank and the banking regulator PRC, , In advanced Western economies, some financial regulators that are independent of their respective central bank also endeavour to create a regulatory environment that is favourable to innovation and growth ACPR, ; FINMA, ; OCC, What reforms could be undertaken? This arrangement violates the equivalence principle of global governance: all jurisdictions affected by a global good or bad should have a say in its provision and regulation Held and Young, Greater national autonomy in a fragmented global financial system would in theory allow each country to tailor standards to their financial markets and regulatory capacity, and achieve an optimal balance between financial stability and inclusive growth.

But in practice, given the distribution of power in global financial markets, a few leading jurisdictions can be expected to dictate the rules of finance. The FSB took modest steps in this direction in , rearranging the Plenary to give more seats to officials from emerging market member jurisdictions FSB, At the same time, it reduced the seats of international organisations such as the IMF and the World Bank, who could in principle represent developing country voices, but in practice have done so with negligible effectiveness. More radical proposals include the merger and formalisation of existing financial governance bodies.

Avgouleas envisions the integration of micro and macroprudential supervisory institutions on the basis of an umbrella treaty that is signed and ratified by member states in accordance with international public law.

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  • Despite calls for reform and sophisticated proposals, none of them has come to fruition in the decade since the global financial crisis. While a radical overhaul may not be feasible, more moderate reforms could be pursued to ensure that international standards have greater utility and fewer adverse effects for developing countries.

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    The Basel Committee could amend its charter to explicitly recognise the need for differentiated standards and commit to build proportionality into their design, so they can be readily adapted for use in a wide range of jurisdictions. Furthermore, it could commit to impact assessments of new standards for developing countries ex ante.

    Global Financial Regulation: Shortcomings and Reform Options

    The Basel Consultative Group could review its membership to ensure it is broadly representative, inviting new members in particular from LMIC. Steps should be taken to strengthen the evidence base from which developing country regulators can make proposals. The research conducted by the Bank for International Settlements focuses on the regulatory priorities of developed countries, while the IMF and World Bank focus on providing technical advice to developing countries on how to implement international standards, rather than supporting developing countries to shape global standards during the design phase.

    Relations between regulators and the industry they regulate are important in building this evidence base, but authorities should take care to not reproduce the skewed system of interest aggregation prevalent in advanced economies, where vested interests and large financial firms have a disproportionate influence on regulatory designs Lall, ; Quaglia, Rather than seeking to address digital financial services within old organisations that resist reform, a new body could be created under the aegis of the FSB. We use cookies to help provide and enhance our service and tailor content.

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    This page was processed by aws-apollo5 in 0. Skip to main content. Copy URL. Abstract The financial crisis will not be forgotten in a hurry because of its impact on the global financial system almost replicating the Great Depression. April 27, Register to save articles to your library Register.

    Banking on Basel: The Future of International Financial Regulation Banking on Basel: The Future of International Financial Regulation
    Banking on Basel: The Future of International Financial Regulation Banking on Basel: The Future of International Financial Regulation
    Banking on Basel: The Future of International Financial Regulation Banking on Basel: The Future of International Financial Regulation
    Banking on Basel: The Future of International Financial Regulation Banking on Basel: The Future of International Financial Regulation
    Banking on Basel: The Future of International Financial Regulation Banking on Basel: The Future of International Financial Regulation
    Banking on Basel: The Future of International Financial Regulation Banking on Basel: The Future of International Financial Regulation

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