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The Role of Regulation in a Crisis—

Lessons and Conclusions

Rony Hizkiyahu, Supervisor of Banks24 December 2009

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The main goals of financial regulation

• Stability of the financial institutions

• Reduction of systemic risk

• Fair and efficient markets

• Protection of consumers and investors

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The effect of the crisis on financial regulation

• Revealed inadequate supervision and regulation

• Revealed inadequate risk management in financial institutions.

The basic assumption is that crises happen and will happen

• Preparation of the financial system for possible crisis.• Highlighting crisis management.

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The preparation of the financial system to a possible crisis

• Defining financial institutions of systemic importance

• Bringing other entities under the supervisory and regulatory umbrella

• Strengthening the risk management control processes

- Corporate governance - Remuneration policy - The risk management function

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Preparing the financial system for crises (cont.)

• Reducing pro-cyclical effects

• Reducing financial leverage

• Enhancing market discipline

• Macro-prudential information and indicators for systemic supervisory purposes

• Improving liquidity risk management

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Supervisors' preparedness for crisis

• Monitoring systemic risk factors

• Engaging extreme scenarios and or stress tests

• Integrating work processes to enable rapid response

• Tools for supporting a failing financial institution (LOLR–lender of last resort)

• Creating a cooperative environment and a supportive regulatory structure

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Conclusion

Improving financial regulation and supervision is the key

to reducing the probability of the failure of a specific institution and the development of a systemic crisis:

• The regulator has a central role in preparing the system for crisis and dealing with it;

• The regulator must reinforce his ability to handle crises by creating a cooperative structure.

At the same time, the main responsibility for improving

risk management and corporate governance rests on the business sector.

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Thank You

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Changes in the architectural structure ofFinancial Regulation

Conduct of Business

CB

Prudential Supervision

Systemic Stability

SS PS

Transformation from sectorial to functional regulation

Regulation and supervision cross-sector to achieve three goals:

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The position of financial regulation

The global trends ensuing the lessons learned from the financial crisis demonstrate the expanding role of the central bank in financial stability and strengthening the link between the banking supervision and the central bank.

Unified prudential supervision in the central bank