Financial stability and systemic risk

Kimmo Soramäki and Samantha Cook

Historically, regulatory structures and policy initiatives evolved to address problems, often as a consequence of crises or a failure of a prominent institution. The end of the 20th century was characterised by deregulation, globalisation, innovation and consolidation of the financial industry. Generally, the regulation of financial institutions and markets is organised based on the type of financial services provided and the products offered to clients. Thus, regulatory oversight of the financial industry is often fragmented, especially in developed economies. Banks, insurance and investment companies were not, and are still not, regulated by the same agencies in most countries. As an example, Figure 10.1 illustrates the complexity of US financial regulations. Large financial institutions are often regulated by multiple agencies.

The global financial crisis of 2007–08 highlighted the inadequacy of product-based regulatory silos to oversee and identify problems in the global financial system. As the crisis unfolded, the leaders of the G20 nations united in their efforts to enact consistent policies across jurisdictions to identify accumulation of systemic risk and thus improve