Do financial markets need more regulation ?

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Do financial markets need more regulation ?

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Introduction

Defi nition « Process of authorising, regulating and supervising financial markets

and financial institutions themselves » Davis & Green

W h y r e g u l a t e ? ▪ Financial markets have become bigger/ + complex/ + inter/ +

concentrated▪ Banks & FI : Big part of the real economy ▪ Possible dysfunction of the financial system ▪ Externalites caused by financial activities

Objectives of fi nancial regulation ▪ Improve information ▪ Promote financial stability (systemic risk) ▪ Maintain or enhance competitiveness of the financial sector

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Regulation today

Re g u l a t o r s

International G20 / WB / IMF / WTO …

In Europe ECB European Supervisory Agencies

European banking Authority European Securities & Markets Authority European insurance and occupational pensions authority

Financial stability board

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Regulation today

Re g u l a t o r s In USA

Fed State authorities Federal Deposit Insurance Corporation Office of the Comptroller of the Currency

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Regulation today

Re g u l a t i o n a c t s

Lamfalussy Procedures

To design the rules of the EU financial sector

Dodd-Franck Act (July 2010) – USA : - Promote stability- Increase transparency and accountability in financial

sector- Prevent bail-outs with public money and end « too big to

fail »- Protect consumers against bank failures & abusive

practices Vickers recommandations – UK

Intended to minimise risk of credit crunch

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Regulation today

Re g u l a t i o n a c t s

Basel I

Set harmonised K ratio for the stability of the banking systemBasel II

Improve minimum K requirements Supervision Transparency and market disclosure

Basel III ▪ Improve loss & shock absorption capacity ▪ Improve risk management and governance ▪ Strengthen banks’ transparency & disclosure

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Crisis : A lack of regulation ?

L o t o f c a u s e s

Macroeco factors :loose mo po & global financial imbalances causing large K inflows

Multiple failures by many FI Excessive leverage ratio to grow balance sheet & generate business

volumes Excessive recourse to wholesale & short term funding & insuficient

focus on liquidity risks Insufficient K levels Uncontrolled securitisation Lack of transparency & use of off-balance sheet techniques Governance failures

Mistakes by « surveillance agents » : rating agencies/audit firm

Inadequate regulatory framework of banks & shadow banking

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More or less regulation ?

This is not rea l ly about the level of

regulat ion,

This is more about the structure of the

fi nancia l system i tse l f

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LEVEL OF REGULATION : More ?

More or less regulation ?

LIKE WHAT ? - Rules • Labour laws• Company laws on corporate governance • Competition law rules • Accounting rules

- K & liquidity requirements (Bks/Invt Bks)

- Restrictions on acquisition of certain assets

- Separation of deposit banks and Investment

banks

CONSEQUENCES • Reduce risk but potentially trigger or exacerbate

economic difficulties or funding pb for bks

• Make the rise of K/assets more difficult

BASEL III : illustration

Leverage ratio / 2 Liquidity ratios / + K requirements / Additional risk-based rules

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LEVEL OF REGULATION : Less ?

Law of profi ts & speculat ion : More money

The system can’t regulate i tse l f : Cr is is !

Huge cost of regulat ion E x : S e p a r a t i o n o f d e p o s i t b a n k s a n d I n v e s t m e n t

b a n k s

Regulat ion is not homogeneous

More or less regulation ?

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THE STRUCTURE OF THE FINANCIAL SYSTEM

Dematerialisation of financial operations : they are not aimed at the real economy

Disequilibrium between virtual economy and real economy

Regulation & supervision not adapted

Uniformisaition of behaviours vs diversity of institutions

Too much concentration of banks & interdependence

Sectors not regulated : hedge funds & securitisation- Paradox

The deposit banks and Investment banks are not separated

Size and power of banking lobbies : Block the reinforcement of regulation authorities

Conflict of interests : Rating agencies

Serious ethical lapses : fraud / defaults …

Lack of coordination at an international / European level

More or less regulation ?

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To conclude

General Trend : More regulation

French trend : a willingness to change with the Moscovici law

The market is not an end in itself but the best way to reach economic efficiency, only if the market is regulated in the public interest.

In order to accomplish this, we need a system « based on common sense, courage and imagination to serve social justice & wealth creation » * rather than on new regulation rules.

We are in a consumer society where « only the power of money is recognised » *

Maria Nowak, l’Espoir économique