Yesterday's problem: Banks that are too big to fail..
Today's worry: Institutions that are too "interconnected" to fail..
The last 2 decades of financial imagery and innovation, combined with globalisation has created a financial system with entities that are connected in unimaginable ways. This interconnectivity has been raised by Trichet that there is an impending need to extend regulatory and supervision oversight to "systematically important" financial institutions.
In the last century, supervisors and central bankers have conveniently and neatly grouped financial institutions into Banks and Non-banks, but the over-simplistic approach to non-bank financial institutions is now deemed to be obsolete. Hedge funds, credit rating agencies, credit default swaps, structured investment vehicles and offshore centres are areas highlighted by Trichet as requiring more regulation and supervision. The role required is likely to include more monitoring, and analysis of financial stability, developing early warning systems for risks to the financial system, conducting stress testing exercises and advising on financial regulation to improve stability.
Today's worry: Institutions that are too "interconnected" to fail..
The last 2 decades of financial imagery and innovation, combined with globalisation has created a financial system with entities that are connected in unimaginable ways. This interconnectivity has been raised by Trichet that there is an impending need to extend regulatory and supervision oversight to "systematically important" financial institutions.
In the last century, supervisors and central bankers have conveniently and neatly grouped financial institutions into Banks and Non-banks, but the over-simplistic approach to non-bank financial institutions is now deemed to be obsolete. Hedge funds, credit rating agencies, credit default swaps, structured investment vehicles and offshore centres are areas highlighted by Trichet as requiring more regulation and supervision. The role required is likely to include more monitoring, and analysis of financial stability, developing early warning systems for risks to the financial system, conducting stress testing exercises and advising on financial regulation to improve stability.
Whether how Trichet's proposals will tie in with what the Obama administration has in mind is likely to take months to thresh out. It may ultimately lead to a super agency and the list of headline-screaming reforms will definitely have an impact on both financial markets and investor confidence. But whoever's in charge should keep in mind that the one size fit all approach from policy makers across both sides of the atlantic needs to manage the increased supervision without stifling innovation.
Eric Tan, London
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