18 December 2009

Bank of Japan Shirakawa - Reforming the framework of financial regulation

It is impossible to supervise or regulate every inch of the activities of financial institutions, the bank governor said. “The myopic behaviour of shareholders and managers cannot be restrained simply by enhancing minimum capital ratio standards or through other regulations”.

“Given the limited resources of supervisors and regulators, it is impossible to supervise or regulate every inch of the activities of financial institutions”, Masaaki Shirakawa, Governor of the Bank of Japan said in a speech held on 11 December in Kuala Lumpur. “Given the limited liability of shareholders, the myopic behaviour of shareholders and managers cannot be restrained simply by enhancing minimum capital ratio standards or through other regulations”, he added.

 

Experience has shown the difficulty to capture risk correctly. “After all, the first line of defence of a financial institution is its managers whose task is to properly identify and manage risks to ensure the financial soundness of their institutions”, he underlined.

 

Shirakawa required a minimum set of common rules for internationally active financial institutions. However, there should be enough room for its regional application. In some Asian jurisdictions the outstanding amounts of government bonds issued are small, as a result of fiscal discipline, he noted. A stricter liquidity regulation could even be for these jurisdictions.

 

Also, in Japan the monitoring of liquidity positions of financial institutions are applied in a more detailed manner on a routine basis, he noted. “Therefore, it might be difficult to always establish an internationally uniform hard-wired standard”.

 

Direct causes of the near failure of financial institutions was the lack of liquidity, rather than the lack of capital, Shirakawa finally noted, and suggested currency swap arrangements and cross-border collateral arrangements as effective liquidity supplement tools. Enhancing the infrastructure of financial transactions, including the shortening of settlement periods, is also an important issue, he said.

 

Full speech

 

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