Sylvie Matherat Director, Financial Stability Bank of France

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Sylvie MatheratDirector, Financial StabilityBank of France

LSE and Deutsche Bank Conference on

« Reforming the Global Architecture of Financial Regulation »

19/03/2009

Macro-prudential and regulatory reforms : what is needed to make the global financial system less

crisis prone?

DIRECTION DE LA STABILITE FINANCIERE2

Introduction These reforms are needed as there is

no way out for the economy if the financial system is not back on track:

On a short term basis: an urgent need to fix financial situation of credit institutions

On a medium /long term basis: a new regulatory/prudential oversight for a new financial system;


Outline

The new framework is twofold

1/ a need to revisit individual regulation and prudential oversight

2/ a need to « invent » a macro prudential framework


Individual regulation/prudential oversight This new micro prudential

framework needs to look at:

incentives

risks

institutions


Improvement of incentives:

Accounting rules: reforms needed to prevent short termism (day one profit, fair value gains)

Prudential rules: Avoid regulatory arbitrage by increasing the capital

coverage of trading activities

Limit procyclicality: VAR through the cycle…

Corporate governance: better implication of board of directors, remuneration policy

Individual regulation/prudential oversight


Better risk coverage:

Tail risk can happen

Off balance sheet risks do not disappear (no clean break/reputation risk)

Funding/liquidity/mismatch risks: they do exist and have a price



Increase regulatory oversight: Banks, non banks

Hedge funds, private equity

Rating agencies

Not only deposit-taking institutions but all intervention in the financial system need to be subject to some form of oversight: leads to the necessity of adopting a macro prudential approach.



A new macro prudential framework:

Its rationale

Its objectives

Its actors

Its tools

A new macro prudential framework


A new macro prudential framework, why?

Good regulation and incentives at micro prudential level does always not make a good macro economic policy

Harmonization of rules leads to mimetic behaviour



A new macro prudential framework General objectives:

Limit risks of distress for the financial system as a whole

Reduce procyclicality of financial regulation

Prevent excessive risk taking/leverage in order to avoid disconnection between financial sector and the real economy

Enhance crisis resolution


The Actors:

Need for an international financial architecture ensuring level playing field

International Financial Institutions: IMF and FSF

expected to collaborate for the regular conduct of Early Warning Exercises

Central banks having a double role in financial stability: crisis

management (liquidity provision, swap agreements) and macro prudential surveillance

Colleges of supervisors



The tools Possible use of microprudential tools:

Countercyclical capital buffers, Dynamic provisioning and valuation reserve, Leverage ratio including off-balance sheet items

Need to enhance institutional capabilities for systemic risk detection:

So far, limited efficiency of early warning indicators, Need to improve information on cross-border banks’ exposures

and systemic institutions Need to have a better grasp of interbank markets developments,

and on price determination



Conclusion Impossibility of preventing financial crises

But need to limit procyclicality of financial regulation and regulatory arbitrage

Key role of central banks in financial stability and macroprudential surveillance

Works in progress on effective tools for the monitoring of systemic risks

Documents

Sylvie Matherat Director, Financial Stability Bank of France