Transcript Regulating the Financial Markets: Lessons, Challenges, and Prospects in the Aftermath of the

Regulating the
Financial Markets:
Lessons, Challenges, and
Prospects in the Aftermath of the
World Crisis
Howard Davies
Director, LSE
EFSA
Ewart Memorial Hall
Cairo, 12 December 2010
Five Topics
1. The Financial Stability Board
2. European Regulation
3. Regulation and Markets:
A New Contract?
4. Effective Governance in Financial
Firms
5. Financial Sector Pay
1. The Financial Stability
Board
The Pre-Crisis Architecture
Global current account imbalances
grew rapidly from 2003
Estimates of account balances for selected countries ($ Billion), 1993-2008
Source: The Turner Review: A regulatory response to the global banking crisis. March 2009.
The Post-Crisis Architecture
At a minimum, the FSB
should:
- Have a legal personality and a larger
staff of its own
- Have a full-time chairman
- Be the accountability mechanism for
the standard-setters like the Basel
Committee and IOSCO, acting on
behalf of the G20
- Monitor regulatory changes in
individual countries.
2. European Regulation
EU: Pre-Crisis
FSC
Financial
Services
Committee
EFC
Economic
and Financial
Committee
CoRePer
Ambassadors (legislative)
Council
Working Groups
(legislative)
Government Level
(Finance Ministries +
Observers from
regulatory level)
Regulatory Level
(Competent
Authorities)
Council of Ministers
(ECOFIN)
ESC
European
Securities
Committee
CESR
Committee of
European
Securities
Supervisors
ARC
Accounting
Regulatory
Committee
EIOPC
European Insurance
and Occupational
Pensions Committee
CEIOPS
Committee of
European Insurance
and Occupational
Pension Supervisors
3L3 Committee
Central Bank Level
ECB
Outside Commission
Committee Framework
Banking
Supervision
Committee
of the ECB
European Parliament
European Commission
EBC
European
Banking
Committee
CEBS
Committee of
European
Banking
Supervisors
EFCC
European
Financial
Conglomerates
Committee
IWCFC
Interim Working
Committee on
Financial
Conglomerates
AURC
Audit
Regulatory
Committee
EGAOB
European Group
of Audit
Oversight
Bodies
EU: Post-Crisis
European Systemic Risk Board (ESRB)
(Chaired by President ECB)
Macroprudential
supervision
Members of
ECB/ESCB
General Council
+
Chairs of
EBA, EIA
& ESMA
Information on micro-prudential
developments
+
European
Commission
Early risk warning
European System of Financial Supervision (ESFS)
Micro-prudential
supervision
European
Banking
Authority
(EBA)
European
Insurance
Authority
(EIA)
European
Securities and
Markets
Authority
(ESMA)
National Banking
Supervisors
National Insurance
Supervisors
National Securities
Supervisors
Source: De Larosière Report, February 2009.
3. Regulation and Markets:
A New Contract?
“Those of us who have looked to the selfinterest of lending institutions to protect
shareholders’ equity … are in a state of
shocked disbelief.”
Alan Greenspan
October 2008
“There is growing recognition that the dispersion of credit
risk by banks to a broader and more diverse group of
investors, rather than warehousing such risk on their
balance sheets, has helped make the banking and overall
financial system more resilient.
The improved resilience may be seen in fewer bank
failures and more consistent credit provision. Consequently
the commercial banks may be less vulnerable today to
credit or economic shocks.”
IMF Global Financial Stability Report
April 2006
4. Effective Governance
in Financial Firms
5. Financial Sector Pay
Relative pay in the financial
sector rocketed in the 1990s
Excess wage in the US financial sector relative to non-farm private
wage, by type of financial industry
Source: Philippon and Reshef (2009), Wages and human capital in the US financial industry:
1909 – 2006. NBER Working Paper 14644.
The share prices of banks have
languished
Share prices, relative values (May 1999 = 100), May 1999 – Nov 2010
Source: DigitalLook.com.
In conclusion, we still have a
long way to travel
• No central global regulatory authority, with the power to
deliver enhanced regulatory compliance.
• EU structures still not adequate for a single financial
market.
• No consensus on the new relationship between
regulators and markets, and signs that response to the
crisis may produce a new disequilibrium with too large a
role for the state.
• Despite a more robust approach to risk management,
shareholder engagement is needed to make boards more
effective.
• Shareholders must resolve the underlying principal/agent
problem reflected in excess pay.
Regulating the
Financial Markets:
Lessons, Challenges, and
Prospects in the Aftermath of the
World Crisis
Howard Davies
Director, LSE
EFSA
Ewart Memorial Hall
Cairo, 12 December 2010