Transcript Sylvie Matherat

LSE and Deutsche Bank Conference on
« Reforming the Global Architecture of Financial Regulation »
Macro-prudential and regulatory
reforms : what is needed to make
the global financial system less
crisis prone?
Sylvie Matherat
Director, Financial Stability
Bank of France
19/03/2009
1
Introduction

These reforms are needed as there is
no way out for the economy if the
financial system is not back on track:
 On a short term basis: an urgent need to fix
financial situation of credit institutions
 On a medium /long term basis: a new
regulatory/prudential oversight for a new
financial system;
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Outline
The new framework is twofold
1/ a need to revisit individual regulation and
prudential oversight
2/ a need to « invent » a macro prudential
framework
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Individual regulation/prudential oversight

This new micro prudential
framework needs to look at:

incentives

risks

institutions
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Individual regulation/prudential oversight

Improvement of incentives:

Accounting rules: reforms needed to prevent
short termism (day one profit, fair value gains)

Prudential rules:


Avoid regulatory arbitrage by increasing the capital
coverage of trading activities

Limit procyclicality: VAR through the cycle…
Corporate governance: better implication of
board of directors, remuneration policy
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Individual regulation/prudential oversight

Better risk coverage:

Tail risk can happen

Off balance sheet risks do not disappear (no
clean break/reputation risk)

Funding/liquidity/mismatch risks: they do exist
and have a price
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Individual regulation/prudential oversight

Increase regulatory oversight:

Banks, non banks

Hedge funds, private equity

Rating agencies
 Not only deposit-taking institutions but all intervention in
the financial system need to be subject to some form of
oversight: leads to the necessity of adopting a macro
prudential approach.
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A new macro prudential framework

A new macro prudential framework:

Its rationale

Its objectives

Its actors

Its tools
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A new macro prudential framework

A new macro prudential framework,
why?

Good regulation and incentives at micro
prudential level does always not make a good
macro economic policy

Harmonization of rules leads to mimetic
behaviour
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A new macro prudential framework

General objectives:

Limit risks of distress for the financial
system as a whole

Reduce procyclicality of financial regulation

Prevent excessive risk taking/leverage in
order to avoid disconnection between
financial sector and the real economy

Enhance crisis resolution
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A new macro prudential framework

The Actors:
Need for an international financial architecture ensuring
level playing field

International Financial Institutions: IMF and FSF


Central banks


expected to collaborate for the regular conduct of Early
Warning Exercises
having a double role in financial stability: crisis
management (liquidity provision, swap agreements) and
macro prudential surveillance
Colleges of supervisors
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A new macro prudential framework
The tools


Possible use of microprudential tools:




Countercyclical capital buffers,
Dynamic provisioning and valuation reserve,
Leverage ratio including off-balance sheet items
Need to enhance institutional capabilities for
systemic risk detection:



So far, limited efficiency of early warning indicators,
Need to improve information on cross-border banks’ exposures
and systemic institutions
Need to have a better grasp of interbank markets developments,
and on price determination
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Conclusion

Impossibility of preventing financial crises

But need to limit procyclicality of financial regulation
and regulatory arbitrage

Key role of central banks in financial stability and
macroprudential surveillance

Works in progress on effective tools for the
monitoring of systemic risks
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