Financial Regulation and Risk Governance

The financial crisis has revealed that the current legislative framework has proved insufficient. As a consequence, many commentators have argued that there is a need for new regulation in order to reduce the pro-cyclicality of the existing Basel Capital Accord solvency rules as well as avoiding moral hazard problems from deposit insurance. The use of off-balance items such as structured investment vehicles (SIV) as well as the lack of transparency regarding over-the-counter (OTC) transactions has also come in for particular scrutiny. The role of credit rating agencies facilitating complicated structured financial products without proper due diligence has also been heavily debated. In other words, many of the fundamental building blocks in the global financial system have been seriously questioned following the crisis. However, perhaps most fundamentally, the existing regulatory framework as well as complicated risk management models failed to prevent the crisis that emerged from financial institutions’ liquidity problems.