17 June 2009

FSB Draghi: Scope of regulation will be broadened

"The scope of regulation will be broadened and the intensity of oversight will be recalibrated”, Draghi said. “How to deal with too-big-to-fail institutions and related moral hazard concerns will be an important focus ahead.”

The need in future is to take a system-wide approach to the assessment of financial system and economic conditions, as well to the system’s regulation, rather than focus alone on the health of individual institutions, markets and products, Mario Draghi, Governor of the Bank of Italy and Chairman of the Financial Stability Board said at IOSCO’s Annual Conference in Tel Aviv.

 

It must be ensured that all systemically relevant institutions, markets and activities are subject to appropriate oversight, transparency requirements and, where needed, resolution mechanisms, he said. However, he also warned against imposing excessive, stifling levels of regulation.

 

“In practice, this means that the scope of regulation will be broadened, and that prudential tools and standards, as well as the intensity of oversight, will be recalibrated to better reflect the systemic foot-print of institutions and activities”, he added. “How to deal with too-big-to-fail institutions and related moral hazard concerns will be an important focus ahead.”

 

Mr Draghi concluded with 5 principles that should guide the future reform agenda, namely:

Ø       to recreate a financial system that operates with less leverage, where prudential and regulatory oversight is strengthened, and the system is able to let mismanaged institutions fail.

Ø       establishing clear expectations about what the future regulatory environment will look like.

Ø       while the direction is clear, changes will in cases be gradual, such as phasing in higher capital standards as conditions improve.

Ø       preserve an open and integrated global financial markets and strive for international consistency in standards of regulation.

Ø       resist imposing excessive, stifling levels of regulation to allow for necessary innovation.

 

Full speech

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