How should we regulate the global financial system?

The global financial system is undergoing massive structural
change as a result not only of the crisis but of the regulatory
changes in its wake.
The very fact that the whole post-crisis regulatory overhaul has
been spearheaded by the Financial Stability Board and G20, i.e.
with explicit political backing by a global set of policy-makers, is
very innovative and has not been the case in setting international
regulatory standards before. The past five years have witnessed
a profound change of international regulatory standards for
banks and non-banks alike.
Banks’ regulatory rules have been revised (usually
subsumed under the Basel III heading), resulting in
stronger capital requirements, the first-ever globally
agreed liquidity standards (for a short-term liquidity
and a structural funding measure), and new
standards for constraining large exposures and
improving risk management. Also, supervisory
standards are being raised and the international
standard setter (Basel Committee) has launched a
programme to assess national implementation,
which exerts peer pressure on jurisdictions to
implement the reforms in a consistent manner.
Cross-border resolution difficulties witnessed in the
crisis are reflected in the new set of expectations
with regard to effective resolution regimes and a
process of recovery and resolution planning for the
largest banks, complete with setting up cross-
border crisis management groups composed of
authorities from the (most prominent) jurisdictions
where these banks operate.
Regarding non-banks, the international community
is finalizing a basic solvency requirement for global
insurers who are systemically important – to date
there has been no global solvency standard; over-
the-counter derivatives markets are undergoing
major overhaul with measures aimed at mandating
and/or incentivizing central clearing and trading on
organized platforms with reporting to trade
repositories of all contracts. In terms of insurance
regulation, many countries in Europe, Latin America
and Asia are adopting variants of the Solvency II
regime. New insurance regulation has a strong
emphasis on corporate governance, disclosure and
accountability. These measures are relevant as
they aim to change the broader corporate
behaviour.
International accounting standards are being
changed, in particular to make loss recognition
more forward-looking (newly issued IFRS9).
Some supervisory authority over the financial
sector has been relocated to central banks, most
notably in Europe, where the European Central
Bank has taken on additional responsibilities.
Still, of course, challenges remain. Addressing the issue of “too-
big-to-fail” remains a key issue. Efforts are needed to: (i) finalize
living wills and identify and remove barriers to firms’
resolvability; (ii) reach consensus on banks’ loss-absorbing
capacity to ensure that they can be resolved; (iii) address
obstacles to cross-border cooperation and recognition of
resolution measures; (iv) ensure recovery and resolution of non-
banks; and (v) promote better regulation of the shadow banking
sector. Cross-border challenges persist also in over-the-counter
derivatives reform.
As regulatory regimes developed in parallel in the two largest
markets (European Union and United States), they resulted in a
framework that overlaps and is not completely consistent.
Regulatory decisions allowing reliance on home regulatory
regimes (known as “deference”) are urgently needed. Trade
reporting requirements have been adopted in key countries but
legal barriers frustrate implementation. Progress on trading
standardized contracts on exchanges and electronic trading
platforms continues to slip. Political commitment is needed to
advance reforms in all these area