BIS/Caruana: Financial regulation, complexity and innovation

04 June 2014

Speech by Mr Jaime Caruana, General Manager of the Bank for International Settlements, reviewing some of the regulatory challenges being addressed at the international level, such as combination of thicker buffers, suitable incentives and more intrusive supervision.

A lot has been achieved since the financial crisis in the area of banking regulation and supervision. Further important initiatives are under way, and the focus has rightly shifted to implementation. But in a highly dynamic world, imperfect knowledge leaves regulatory design permanently in catch-up mode. As the system evolves and new kinds of risks emerge, especially outside the banking system, we need to employ a multidisciplinary, proactive approach, involving a combination of thicker buffers, suitable incentives and more intrusive supervision. Such an approach can help us in addressing new risks, such as in shadow banking and capital markets.

"While we've gone quite a way down the post-crisis "to-do" list, there are still a number of key items that need to be finalised.

One area is bank resolution. We have addressed one aspect of the "too big to fail" problem by establishing higher capital standards and more intensive supervision for the largest internationally active banks. But we also need to put in place mechanisms to resolve these institutions in an orderly way, to reduce the potential systemic disruption their failure could cause. There is also work to ensure that banks maintain an adequate buffer, the so-called gone-concern loss-absorbing capacity, or GLAC, that would take losses in the event of insolvency. This is a long-term project, which requires among other things enhancements to regulatory rules, legal frameworks, cooperation agreements among supervisors, and quite a bit of advance planning.

We are also working to strengthen standards for insurance regulation. The crisis showed that, while insurance is generally a pretty stable business, risks can lurk there undetected and suddenly emerge in a way that threatens financial stability. Just think of AIG, or the monolines. The International Association of Insurance Supervisors (IAIS), working with the Financial Stability Board (FSB), has started publishing lists of globally systemic insurers and measures to strengthen their loss absorbency and supervision. They are also working to enhance capital and supervisory standards for the insurance industry more broadly.

As we work our way down this agenda, the spotlight is shifting to assessing implementation and monitoring the intended and unintended consequences.

Implementation is key - both in letter and in spirit. Tommaso understood this and indeed, in his Per Jacobsson Lecture at the BIS in 2010, went so far as to say that "Stronger enforcement of the existing [pre-crisis] rules would have sufficed" to prevent the crisis. The Basel Committee has now turned a substantial part of its attention and resources to reviewing implementation of Basel III. They have not been shy about pointing out areas in which members, even the largest ones, fall short of the framework."

Full speech

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