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The international regulatory bodies including Financial Stability Board (FSB), IMF and BIS along with national supervisory bodies have developed a set of regulatory and supervisory reforms that aim at increasing the effectiveness of financial sector supervision. Furthermore, the G20 leaders at various Summits have endorsed the policy framework recommended by FSB and BCBS, which has made countries reach a consensus on the selection of a reforms agenda. Much of the focus of the reforms is on improving the soundness of the banking system, addressing the Systemically Important Financial Institutions (SIFIs), developing macro-prudential policy tools, strengthening accounting standards, disclosure requirements and crisis resolution framework.
The BCBS also set a rather relaxed timeline from 2013 to 2019 for the adoption of Basel III. It is therefore expected that increased capital requirements and further consolidation in international banking will prove to be a major step towards promoting financial stability. However, since Basel III only affects banks, the regulators of other financial sectors such as insurance are expected to encourage the implementation of solvency II for insurance companies in order to reduce the presence of shadow banking and restrict the risk to move towards less regulated entities or creating regulatory arbitrage.
Under the new reforms agenda, emphasis is on changing Too Big To Fail (TBTF) status of SIFIs and for devising a resolution regime as well as a safe exit mechanism for these entities. Further, supervisory authorities are focusing on enhanced supervision of SIFIs to mitigate the financial risks propagated by them through interconnectedness with other institutions that cause system-wide distress. Similarly, a multi-pronged strategy has been adopted for addressing the risks posed by G-SIFIs (Global SIFIs) that comprises development of a new international standard for resolution regimes, more intensive and effective supervision, and requirements for cross-border cooperation, recovery, and resolution planning.