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Reform of Financial Supervisory and Regulatory Regimes: What has Been Achieved and What is Still Missing

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  • Takatoshi Ito

Abstract

Weak financial supervision was partly responsible for the Global Financial Crisis (GFC) of 2007--2009. The liquidity risk in the special purpose subsidiaries was not well recognized in regulation; there were large financial institutions that escaped rigorous supervision; and the concept of ‘too-big-to-fail’ caused moral hazard in management. This paper examines whether these shortcomings were adequately addressed in the post-crisis reform of the global financial architecture. The United States overhauled the supervision framework, which includes shifting supervision authorities of systemically important financial institutions (SIFIs) to the Federal Reserve and increasing capital requirement on those SIFIs. Similar reforms of supervision frameworks have been implemented in European countries. The Bank of International Settlements (BIS) also proposed Basle III, significantly increasing capital requirements, and modifying risk weights. Despite all these efforts, one key component on the reform agenda is not adequately addressed, namely the procedure to have an orderly resolution mechanism for a large financial institution. Without the procedure, the too-big-to-fail problem will continue to cast a shadow over the global financial architecture.

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  • Takatoshi Ito, 2011. "Reform of Financial Supervisory and Regulatory Regimes: What has Been Achieved and What is Still Missing," International Economic Journal, Taylor & Francis Journals, vol. 25(4), pages 553-569, December.
    • Handle: RePEc:taf:intecj:v:25:y:2011:i:4:p:553-569
    DOI: 10.1080/10168737.2011.636620
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    1. repec:fip:fedfpr:00004 is not listed on IDEAS
    2. Sheila C. Bair, 2011. "We must resolve to end too big to fail," Proceedings 1111, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Alex Coad & Masatoshi Kato, 2021. "Growth paths and routes to exit: 'shadow of death' effects for new firms in Japan," Small Business Economics, Springer, vol. 57(3), pages 1145-1173, October.
    2. Dror Y. Kenett & Sary Levy-Carciente & Adam Avakian & H. Eugene Stanley & Shlomo Havlin, 2015. "Dynamical Macroprudential Stress Testing Using Network Theory," Working Papers 15-12, Office of Financial Research, US Department of the Treasury.
    3. Levy-Carciente, Sary & Kenett, Dror Y. & Avakian, Adam & Stanley, H. Eugene & Havlin, Shlomo, 2015. "Dynamical macroprudential stress testing using network theory," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 164-181.

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