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Regulating the Financial Markets: Lessons, Challenges, and Prospects in the Aftermath of the World Crisis. Howard Davies Director, LSE. EFSA Ewart Memorial Hall Cairo, 12 December 2010. The Financial Stability Board European Regulation Regulation and Markets: A New Contract? - PowerPoint PPT Presentation
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Regulating the Financial Markets: Lessons, Challenges, and
Prospects in the Aftermath of the World Crisis
Howard Davies
Director, LSE EFSA
Ewart Memorial Hall
Cairo, 12 December 2010
Five Topics
1. The Financial Stability Board
2. European Regulation
3. Regulation and Markets:
A New Contract?
4. Effective Governance in Financial Firms
5. Financial Sector Pay
1. The Financial Stability Board
The Pre-Crisis Architecture
Global current account imbalances grew rapidly from 2003
Estimates of account balances for selected countries ($ Billion), 1993-2008
Source: The Turner Review: A regulatory response to the global banking crisis. March 2009.
The Post-Crisis Architecture
At a minimum, the FSB should:
- Have a legal personality and a larger staff of its own- Have a full-time chairman- Be the accountability mechanism for the standard-
setters like the Basel Committee and IOSCO, acting on behalf of the G20
- Monitor regulatory changes in individual countries.
2. European Regulation
CoRePerAmbassadors (legislative)
FSC Financial Services
Committee
3L3 Committee
EFCEconomic
and FinancialCommittee
Council of Ministers(ECOFIN)
European Parliament
European CommissionCouncil Working Groups
(legislative)
Government Level
(Finance Ministries +Observers from regulatory level)
ESCEuropeanSecuritiesCommittee
ARCAccountingRegulatoryCommittee
EIOPCEuropean Insurance
and OccupationalPensions Committee
EBCEuropeanBanking
Committee
EFCCEuropeanFinancial
ConglomeratesCommittee
AURCAudit
RegulatoryCommittee
Regulatory Level
(Competent Authorities)
CESRCommittee of
European Securities
Supervisors
CEIOPSCommittee of
European Insurance and Occupational
Pension Supervisors
CEBSCommittee of
European Banking
Supervisors
IWCFCInterim Working Committee on
Financial Conglomerates
EGAOBEuropean Group
of AuditOversight
Bodies
Central Bank Level
Outside CommissionCommittee Framework
ECB
BankingSupervisionCommitteeof the ECB
EU: Pre-Crisis
Macro-prudential supervision
Micro-prudential supervision
Source: De Larosière Report, February 2009.
Members of ECB/ESCB
General Council
European Systemic Risk Board (ESRB)(Chaired by President ECB)
Chairs ofEBA, EIA& ESMA
European Commission
European System of Financial Supervision (ESFS)
European Banking Authority
(EBA)
EuropeanInsurance Authority
(EIA)
EuropeanSecurities and
MarketsAuthority(ESMA)
National BankingSupervisors
National InsuranceSupervisors
National SecuritiesSupervisors
+ +
Information on micro-prudential developments Early risk warning
EU: Post-Crisis
3. Regulation and Markets: A New Contract?
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity … are in a state of shocked disbelief.”
Alan GreenspanOctober 2008
“There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped make the banking and overall financial system more resilient.
The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently the commercial banks may be less vulnerable today to credit or economic shocks.”
IMF Global Financial Stability Report
April 2006
4. Effective Governance in Financial Firms
5. Financial Sector Pay
Relative pay in the financial sector rocketed in the 1990s
Excess wage in the US financial sector relative to non-farm private wage, by type of financial industry
Source: Philippon and Reshef (2009), Wages and human capital in the US financial industry: 1909 – 2006. NBER Working Paper 14644.
The share prices of banks have languished
Source: DigitalLook.com.
Share prices, relative values (May 1999 = 100), May 1999 – Nov 2010
In conclusion, we still have a long way to travel• No central global regulatory authority, with the power to
deliver enhanced regulatory compliance.• EU structures still not adequate for a single financial
market.• No consensus on the new relationship between regulators
and markets, and signs that response to the crisis may produce a new disequilibrium with too large a role for the state.
• Despite a more robust approach to risk management, shareholder engagement is needed to make boards more effective.
• Shareholders must resolve the underlying principal/agent problem reflected in excess pay.
Regulating the Financial Markets: Lessons, Challenges, and
Prospects in the Aftermath of the World Crisis
Howard Davies
Director, LSE EFSA
Ewart Memorial Hall
Cairo, 12 December 2010