29 October 2009

Christian Noyer: beyond Pittsburgh – the future of financial regulation

Christian Noyer emphasised the need to achieve a balance implementation of all the financial regulation currently on the agenda. If coordination does not exist, there is a high risk of ending up with an inefficient system and regulatory arbitrage.

Reforming and adapting financial regulation remains an urgent priority. The G20 Leaders have agreed on detailed principles and a roadmap. The newly formed Financial Stability Board has the difficult task of steering regulatory reform. We are very fortunate that the FSB, as well as the Basel Committee, has been enlarged and become a true reflection of the world economy.

He summarised the main current objectives:

·         Keep up the momentum in the pursuit of reforms. Once the immediate dangers have receded, the incentives to reform may become weaker and the opposition stronger. It is essential that policy makers do not forget the crisis so easily and that they keep improving the system.

·         Achieve balance in the implementation of the agenda. The regulatory agenda is comprehensive and complex. It has been thoroughly debated. It has to be taken as a whole and cannot be implemented in a piecemeal fashion; otherwise, we would recreate distortions and new possibilities of regulatory arbitrage. Mr Noyer illustrated this challenge with two examples: procyclicality and leverage.

·         Ensure consistency between our regulatory actions and macro-economic policy. This is especially relevant for the capital regime. Banks must have a much stronger capital base in the long run. But, in the short run, credit is expected to continue flowing into the economy in order to avoid any abrupt, disorderly deleveraging. In the euro area, the economy depends on the banking system for more than two-thirds of its financing.

He concluded by saying that “competition policy in the financial sector must be reinvented. This cannot be done without some vision about the future shape and structure of the financial industry, as well as the degree and modalities of its internationalisation. The debate is clearly open. This is – for all G20 policy-makers, the FSB and regulators – a formidable challenge.”

Full speech