G30: regulation struggling to keep pace with modern finance

Financial regulation in many countries has been unable to cope with the speed of change in the financial services industry over recent decades, according to a report released on October 6 by the Group of Thirty (G30).

The group includes central bank governors, as well as leading economists and industry experts.

Paul Volcker, former chairman of the US Federal Reserve and chairman of the G30’s board of trustees, said the global financial system had raised questions during the recent crisis stirred up by delinquent US subprime mortgages.

“There is great unanimity in the feeling that regulation and supervision need to be revised,” he said during a briefing hosted by pension fund Tiaa-Cref in New York.

Entitled The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace, the report analyses the regulatory approaches of 17 different countries. It noted the move towards larger and more integrated financial institutions in recent years, and the blurring of boundaries between banking, insurance and securities firms.

The report said these developments had exposed the shortcomings of regulatory models that had not been updated to reflect new business realities, which was raised as a concern by many of the supervisors interviewed by the G30.

The changing nature of banking had additionally highlighted the importance of international co-operation between regulators, according to the report. It said supervisors were worried about inadequate international co-ordination, and also that the present ad-hoc system of co-operation might not be able to cope with the failure of a large financial institution.

During the briefing, Volcker questioned the effectiveness of co-ordination among European Union member states in response to the crisis. The EU has recently struggled to come up with a unified reaction to the troubles that have beset the region’s banks.

“One of the most interesting things about this crisis is that the UK, which has the most highly-integrated regulatory system, has had trouble co-ordinating responses between the Bank of England, the Treasury, and the Financial Services Authority,” said Volcker.

The G30 stressed no particular model had proved unambiguously superior. However, it emphasised the “critical importance” of having regulatory frameworks that could adapt to change – and said this was underlined by the restructuring of banks taking place in the wake of the crisis.

The report cited the need for central banks to have a direct relationship with large and important financial institutions, and the need for regulators to have a proper overview of complicated financial conglomerates.

Effective communication was a recurrent theme in the report, both between jurisdictions and between central banks and other supervisory bodies.

It also remarked on the importance of effective deposit protection schemes and the need for international convergence towards high regulatory standards in areas such as accounting.

The G30 would make further recommendations on regulatory reform as the market turmoil played out, said Volcker.

See also: CRMPG calls for daily counterparty risk reports
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