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The Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency have issued definitive guidance on supervisory expectations for stress testing by banking organizations with more than $10 billion in total consolidated assets.  This set of interpretations is a final version of initial guidance issued June 15, 2011, and provides high-level principles for stress testing practices required of big banks and depository institutions.  Overall, it “highlights the importance of stress testing as an ongoing risk management practice that supports a banking organization’s forward-looking assessment of its risks and better equips the organization to address a range of adverse outcomes.”

The Basel Committee on Banking Supervision is seeking comment on initial policy proposals emerging from the Committee's fundamental review of trading book capital requirements The consultation paper contemplates a revised market risk framework and proposes specific measures intended to improve trading book capital requirements. These proposals also reflect the Committee’s increased focus on achieving a regulatory framework that can be implemented consistently by supervisors and which achieves comparable levels of capital across jurisdictions.

In a letter to Senate Banking Committee Chairman Tim Johnson (D-SD), Senator Bob Corker (R-TN), a key member of the Committee, has called for immediate investigation into the details of the JPMorgan Chase & Co. trading losses. Senator Corker wants the committee to examine if the trades in question were bona fide hedging transactions or poorly managed proprietary trades, and wants to explore whether US taxpayers are fully protected from losses at major financial institutions. In addition, Senators Levin (D-MI) and Merkley (D-OR), authors of the Dodd-Frank Act's Volker Rule, have issued statements urging rapid adoption of Volker Rule regulations prohibiting hedge fund investments by large financial institutions being disguised as risk mitigation or market making.

At the request of the Financial Stability Board, IOSCO has published a consultation paper on the potential regulatory reforms of money market funds.  The study represents one of the five workstreams the FSB has organized for the analysis of the potential regulation of various aspects of shadow banking.  The purpose of the consultation paper is to share with market participants IOSCO’s preliminary analysis regarding the possible risks money market funds may pose to systemic stability, as well as possible policy options to address these risks.  IOSCO is actively seeking feedback on this preliminary work, and commenters have the opportunity to shape IOSCO's ultimate recommendations to the FSB.

The FSB Workstream on Securities Lending and Repos ("Workstream") under the FSB Shadow Banking Task Force has published an interim report on its findings and progress. The mission of the Workstream is to present, by the end of 2012, policy recommendations to strengthen regulation of securities lending and repos within the context of the shadow banking system.  In order to inform its decision on proposed policy recommendations, the Workstream has reviewed current market practices through discussions with market participants,  and existing regulatory frameworks through a survey of regulatory authorities.  This interim report identifies a number of issues that might pose risks to financial stability, and these financial stability issues will form the basis for the next stage of its work in developing appropriate policy measures to address risks where necessary.

As a result of commitments made at the G20 in 2009, member states across the globe are engaging in a number of regulatory reform initiatives addressing derivatives. Though the G20 members agreed to some basic principles of regulation, and officials say that some level of cooperation and coordination is happening, the proposed regimes are not identical, and each may have extraterritorial effects.  These new sets of rules and regulations emanating from each jurisdiction's initiative may present some difficult compliance issues for end users of derivatives with global trading operations.  Sidley & Austin has put together a report comparing and contrasting some of the provisions and new regulations under the US's Dodd-Frank Act and those under the EU's EMIR and MiFID II.

In an April 13 address, Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, made clear that he sees the system of shadow banking as a key vulnerability that makes another catastrophic economic crisis nearly inevitable.  In Bernanke's view, the increased importance of the so-called shadow banking system is the primary reason for the severity and pervasiveness of the financial crisis, and the regulatory gaps in which shadow banking activities operate must be addressed by policy makers.

As capital requirements and structural reforms of banks and financial institutions fall into place, global financial regulators are renewing their efforts to bring shadow banking and securitized credit extension under some form of regulatory discipline.  Though shadow banking has many facets needing attention, in an April 19 address at Johns Hopkins University, Lord Turner, head of the UK's Financial Services Authority announced that regulation of repo funding mechanisms would be a priority for the Financial Stability Board this year, and in particular the FSB’s Standing Committee on Supervisory and Regulatory cooperation (SRC), of which he is the chair.

Two new studies examine the influence proxy advisory services like ISS and Glass-Lewis have on the outcomes of proposals made to shareholders in firms' annual proxies, particularly say-on-pay votes, which became mandatory for most public companies in 2011.  Both studies look at the data behind the level of influence ISS and Glass-Lewis have on proxy voting outcomes, but they also look at the extent to which these voting recommendations may affect market reactions and change the way in which executive compensation packages are designed. These reports add valuable data and insights on shareholder voting and the related policy debate.

The Financial Stability Oversight Council (FSOC) has adopted final rules on Supervision and Regulation of Certain Nonbank Financial Companies.  These final rules and the accompanying interpretive guidance lay out in detail the manner in which the FSOC intends to implement the statutory standards and the processes and procedures that the Council intends to follow.

A bi-partisan group of six Senators introduced a bill on March 22 that would postpone the implementation of the Volcker Rule set for on July 2.  Instead, the S. 2223 links the effective date of the Volker Rule to the date regulators finish drafting their Volker Rule regulations. Based on their concerns that Federal Reserve Chairman Ben Bernanke and others have said the regulations implementing the rule may not be completed by the current deadline, Sens. Mike Crapo (R-ID), Mark Warner (D-VA), Kay Hagan (D-NC), Tom Carper (D-DE), Pat Toomey (R-PA), and Bob Corker (R-TN) proposed the legislation. 

With all the legislative changes, additional required disclosures, say on pay and corporate governance issues percolating in the background, investors, companies, and investment managers are faced with a challenging 2012 proxy season. Today we alert you to two issues involving proxy advisory services and point you to a resource for navigating the 2012 proxy season.

Last week, the Technical Committee of the International Organization of Securities Commissions (IOSCO) issued a consultation paper on the distribution by intermediaries of complex financial products to retail and non-retail customers.  The paper focuses on customer protections, proposing nine principles governing suitability and disclosure obligations, and will carry much weight as jurisdictions and IOSCO member regulators design or strengthen their regulatory regimes governing complex securities.

The Bank for International Settlements on Monday issued its Quarterly Review for March 2012. The Review discusses the global effect of European bank deleveraging and also provides highlights from the latest BIS data sets on international banking and financial activity.

Following the financial crisis, regulators embarked on a two-step process of reforming the regulation of MMFs, despite an already comprehensive regulatory framework system of oversight. In 2010, the SEC approved new regulations intended to address credit quality, liquidity, maturity, and transparency concerns. Since that time, the SEC, legislators, the Fed, and market participants have vigorously debated further regulatory measures aimed at reducing the risk of a run on MMFs and providing a cushion against losses.  Are these further reforms necessary? Or have we done enough already?

The European Securities and Markets Authority has issued a discussion draft on proposed regulation of  OTC Derivatives, CCPs and trade repositories.  The draft introduces provisions to improve transparency and reduce the risks associated with the OTC derivatives market and establishes common rules for central counterparties and for trade repositories.

The Bank for International Settlements has issued preliminary locational and consolidated banking statistics for the quarter ended September 30, 2011.  These statistics, though not final, show mixed but encouraging signs of rebound in banking activity.  

Responding to strident criticism of proposed regulations implementing the Volker Rule, former Fed Chair Paul Volker and the Senate authors of the Dodd-Frank Volker Rule provisions defended the rule as absolutely vital and urged the SEC and banking agencies to eliminate unjustified exclusions and exemptions, such as proposed hedging exemptions related to bank investments in private funds.

Nasdaq has proposed new rules for the the qualification, listing, trading and delisting of a broad list of structured notes and other related products. Although the present NASDAQ Rule 5710 includes initial listing standards for equity index-linked securities and commodity-linked securities, NASDAQ's proposal would amend Rule 5710 to add continuing listing standards for equity index-linked securities and commodity-linked securities. Nasdaq has also proposed Rule 5711 which would impose listing standards for a host of other equity-linked, commodity-linked, and other notes.

Dismissing calls to weaken or reconsider global financial reforms, Jaime Caruana, General Manager, Bank for International Settlements, argues that it is more important than ever to continue reforms and see through what has already begun.  Caruana lays out in a recent address before the 2012 ADB Financial Sector Forum four principles he feels should guide these ongoing reform efforts.

George Osborne, the UK's Chancellor of the Exchequer, voiced concerns about the potential negative effects the proposed Volker Rule provisions may have on the liquidity of global funding markets and particularly non-US sovereign debt markets.  Osborne communicated these concerns via a January 23, 2012 letter to Fed Chairman Ben Bernanke.

OTC derivatives legislation and clearing reforms understandably have European and US market participants scratching their heads about what this "sea of change" has in store for them and the future of OTC markets.   David Felsenthal, a partner at Clifford Chance LLP, has given the matter some serious thought, and provides some guidance in his January 14, 2012 post at Harvard Law School's Forum on Corporate Governance and Financial Regulation.

In light of current conditions in the financial markets, CONSOB, the Italian banking and securities regulatory body, has extended its ban on short selling of financial sector stocks.  Initially adopted on August 12, 2011 and subsequently extended until January 15, 2012, the ban has been further extended to February 24, 2012.

Citing “recent congressional and public policy trends disfavoring broker voting of uninstructed shares," the NYSE has severely limited broker discretionary voting of uninstructed shares with regard to corporate governance proposals.  Effective January 25, 2012, matters which would have previously been designated “Broker May Vote” will instead be designated “Broker May Not Vote.” 

K&L Gates' 2012 Annual Outlook provides a valuable collection of articles that address important industry and regulatory trends and their correlation with government and political developments. This edition highlights regulatory issues in areas such as: systemic financial risk regulation, anti-corruption and white-collar enforcement initiatives, tax policies, competition and antitrust law matters, intellectual property and international trade developments. Of particular interest in this year's report is the section on financial services. In this chapter, K&L Gates covers, among other things, updates on regulatory efforts and emerging developments that K&L Gates has identified as areas global financial professionals should keep on their radar screens

On December 20, 2011, the Federal Reserve Board of Directors published its long awaited proposal on enhanced prudential standards and early remediation requirements.  This proposal, required by the Dodd-Frank Act, would impose greater levels of regulation and supervision on certain US bank holding companies and systematically important non-bank financial companies.  

In a December 23, 2011 approval order in connection with the proposed acquisition of RBC Bank (USA), a North Carolina based unit of Royal Bank of Canada, by The PNC Financial Services Group, Inc. includes the FRB's first ever Dodd-Frank financial stability analysis.  This analysis may serve as a model for how the FRB will determine going forward “the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system” now required under Dodd-Frank.    

At its January 11 meeting, the CFTC adopted final business conduct standards for swap dealers and major swap participants.  These rules were proposed in December of 2010, and have garnered much attention and significant comment from the industry, prompting some significant changes from the proposal.

On January 5, the Consumer Financial Protection Bureau (CFPB) launched its non-bank supervision program. The initiative is mandated by Dodd-Frank, and will be an extension of the CFPB’s bank supervision program that began last July.  The program is intended to ensure that banks and non-banks follow federal consumer financial laws.

The rush to reregulate the financial markets after the financial crisis understandably has many concerned about unintended consequences. Regardless of good intentions, the fixes put in place by legislators, central bankers, and regulators no matter how well thought out are bound to affect the complex and constantly evolving global financial markets in unanticipated ways.  Professor Roberta Romano of the Yale Law School shares these worries and proposes in her latest paper, "Regulating in the Dark," a mechanism for addressing and remediating the inevitable unintended consequences of hasty financial regulation.

John C. Coates IV, professor of law and economics at  Harvard Law School, testified before the U.S. Senate Subcommittee on Securities, Insurance and Investment on December 14.  In his testimony, Professor Coates took up three themes related to pending proposals to revise securities laws to (among other things) deregulate widely held but unlisted companies and banks, to permit unregistered "crowdfinancing," and to loosen constraints on small public offerings.

The Basel Committee on Banking Supervision has issued for consultation its revised Core Principles for Effective Banking Supervision. The consultative paper updates the Committee's 2006 Core Principles document as well as the associated Core Principles Methodology, merging the two into a single comprehensive document. The revised set of twenty-nine Core Principles have also been reorganized to foster their implementation through a more logical structure, highlighting the difference between what supervisors do themselves and what they expect banks to do.

Treasury, the Fed, the FDIC, and the SEC have announced an extension of the comment period on the proposed regulations implementing the Dodd-Frank Act's Volcker Rule provisions.  Originally set to expire on January 13, 2012, the comment period has been extended a month until February 13, 2012.

On December 20, ISS published its white paper laying out in detail the pay for performance methodology it will implement under its 2012 policy updates. The goal of the white paper is to help both institutional clients and the companies in which they invest more fully understand ISS’ pay-for-performance methodology in advance of the 2012 proxy season.

In her December 15, 2011 address before the Transatlantic Corporate Governance Dialogue, SEC Chairman, Mary L. Schapiro, stated that in response to comments received on the Commission's Proxy Plumbing concept release, the Commission is seriously considering providing guidance on how the federal securities laws should regulate the activities of proxy advisory firms, in addition to other key areas of proxy reform.

The financial crisis has put a spotlight on the corporate governance structures of financial institutions, raising questions about whether the prevailing governance structures of banks are ineffective and whether implementing independence standards imposed by the Dodd-Frank Act, the Sarbanes-Oxley Act and the major stock exchanges will improve bank governance. A recently published paper by Renee Adams, Professor of Finance at the University of New South Wales, and Hamid Mehran of the Federal Reserve Bank of New York, attempts to answer to this question by examining the relationship between board composition and size and bank performance.

In a December 7 letter to the Fed, SEC, CFTC, OCC, and FDIC, House Financial Services Committee Chair Spencer Bachus (R-ALA) requested that the comment period for the proposed regulations implementing the Dodd-Frank Volcker Rule be extended for at least 30 days to accommodate a January 18, 2012 Financial Services Committee hearing. At present, the comment period for the regulations expires on January 13, 2012. Senator Bachus's letter claims the proposed regulations go too far, and that the proposals "are not clear and need much work."

The Fed, the FDIC and the OCC have issued a release seeking additional comment on proposed modifications to the agencies’ market risk capital rules for banks with significant trading activities. This release amends a December 2010 proposal, and includes alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules. 

On November 15, the House Capital Markets Subcommittee approved legislation that would amend the Employee Retirement Income Security Act, the Commodity Exchange Act, and the Securities Exchange Act to ensure that pension plans can use swaps to hedge risks.  HR 3045 creates an exception for ERISA pension plans allowing them to engage in swap transactions without their swap dealer counterparties incorrectly being labeled as fiduciaries.

Taiwan has recently taken steps to curb short selling and securities lending to address extreme share price volatility.  In an effort to stabilize equity markets, Taiwan's Financial Supervisory Commission on November 21 set a new daily limit on short selling of stocks.   According to the new daily cap, only 20 percent of average trading volume in the...

Over the past few months, spreads for credit default swaps (CDS) have widened quite dramatically. These widening CDS spreads are a clear sign of stress on banks, and that the cost of protecting financial
institution and government debt against default is steadily rising, causing worry across the global financial markets.

In an effort to address regulatory fragmentation in short selling regulations throughout the EU, The European Parliament has adopted a regulation to harmonize the rules on short selling and credit default swaps.  Regulation (2010) 0482 (the "Regulation") is limited in scope and imposes restrictions on short selling and credit default swaps to prevent a disorderly decline in the price of a financial instrument.  The Regulation does not impose other types of restrictions such as position limits or restrictions on products, however.

In a dialog at the Managed Funds Association Outlook 2011 seminar held in October, SEC Chairman Mary Schapiro commented on the international and domestic challenges regulators face in coordinating the regulation of derivatives. From this dialog we can take away some nuggets of assurance that the process of regulating OTC derivatives is being thoughtfully considered, efforts are being made to coordinate both domestically and internationally, and that the implementation process will contain few surprises. 

In a strongly worded letter to Federal Reserve Chair Ben Bernanke, Rep. Maurice Hinchey (D-NY), Rep. Peter Welch (D-VT), and 15 other House members urged the Fed and other federal regulators to reject the current draft of the Volcker Rule regulations and replace them with stronger language to prohibit commercial banks from engaging in investment activities.  

The Basel Committee on Banking Supervision has issued a Frequently Asked Questions document providing technical elaboration on its counterparty credit risk rules, published in June. This FAQ document questions and technical interpretations grouped according to the relevant paragraphs of the rules, in particular, default counterparty credit risk charge, and the credit valuation adjustment (CVA) capital charge, and asset value correlations.

Institutional Shareholder Services Inc. (ISS) has published the 2012 updates to its US and international corporate governance policies. These guidelines are applicable to shareholder meetings held on or after February 1, 2012.  Given the attention regulators and legislators have taken in corporate governance issues as of late, the new ISS guidelines for US companies include changes in several important areas.

On November 9, 2011, Senators Kay R. Hagan (D-NC) and Bob Corker (R-TN) introduced a bill that would provide a legislative framework for establishing a US covered bond market.  The bill has the potential to enhance liquidity and provide to US banks a new source of stable, long-term financing to financial institutions and others derived from private capital markets. 

The UK's Chancellor of the Exchequer has proposed a radical reformulation of financial services regulation, ending the shared oversight of the Treasury, Financial Services Authority, and the Bank of England.  The proposed new structure would unify regulation and supervision under new structures housed in the Bank of England.  This move to centralize oversight could give EU oversight entities, the European Systemic Risk Council and the European System of Financial Supervisors, greater influence in UK financial oversight.  
  

A Financial Stability Board task force has published recommendations to strengthen the oversight and regulation of the shadow banking system. These eagerly awaited recommendations provide much needed guidance to regulatory authorities on monitoring and designing regulation of shadow banking activities and entities.

FSB data published in its October 27, 2011 report, Shadow Banking: Strengthening Oversight and Regulation, reveals that among the eleven largest economies with significant shadow banking, the shadow banking sector has surpassed the levels prior to the financial crisis.

On October 18, the Basel Committee issued a report documenting Basel Committee members' progress in adopting Basel II, Basel 2.5 and Basel III as of September 2011.  The report provides a high level summary of the the status of domestic legislative and rule-making intended to incorporate the Committee's capital standards into national law or regulation according to the internationally agreed time frames.

In his October 6, 2011 testimony before the before the US Congress’s Committee on Banking, Housing, and Urban Affairs, Treasury Secretary Timothy F. Geithner made it clear that shadow banking remains an an area of great concern on his regulatory agenda.  Geithner...

In a forthcoming article, Robert P Bartlett III, Assistant Professor of Law at the University of California, Berkeley, proposes an intriguing model-sensitive disclosure regime he hopes will enhance accurate pricing of a bank's exposure to credit risk while at the same time safeguarding the confidentiality of a bank’s proprietary investment strategies and customer information.  

For the most part, provisions of the Dodd–Frank Wall Street Reform and Consumer Protection relating to derivatives are aimed at increasing transparency, altering clearing and exchange trading requirements, regulation of swap dealers and other swap market participants, restrictions on swaps trading by banks and associated increases in capital and margin requirements. The Act leaves many of the details of implementation to regulators. With over a year behind us, we can now reflect on what regulators have proposed, adopted, and left unfinished with regard to swaps.

At its September 28, 2011 meeting, the Basel Committee (the “Committee) approved a range of measures aimed at finalizing the Committee’s July 2011 consultative document, “Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.” The document sets out the Committee’s proposal on the assessment methodology for (1) determining global systemic importance, (2) determining the magnitude of additional loss absorbency that global systemically important banks should have, and (3) proposes the arrangements by which the methodologies will be phased in. 

In their Quarterly Bulletin (Q3 2011), the Bank of England (BOE) updates us on the latest market-driven and regulatory developments in securities lending, and lays out the lessons learned from the financial crisis about the risk of contagion arising from the interconnectedness between participants created by securities lending transactions, and the dangerous opacity of risks incurred across all participants.

Market events over the past several years have made it quite clear that meaningful and transparent financial data are vital to effective monitoring of market participants as well as understanding the scale of the shadow banking activities and their interconnectedness with the traditional banking system. In a June address in Frankfort, Jürgen Stark, a member of the Executive Board of the European Central Bank (ECB), announced new statistical data sets intended to improve the existing balance sheet and interest rate reporting by "monetary financial institutions." The ECB has introduced these new data sets as part of their effort develop relevant and real-time policies to assess systematic risks and keep apace of innovations and movements in the financial landscape.

The UK Independent Commission on Banking's much anticipated report examining options for the reform of the country’s banking industry was released on September 12.  The report proposes several changes to the structure of the UK banking system that potentially may simplify identification and remediation of failing financial institutions and reduce the probability and effect of bank failures, including the novel idea of "ring-fencing" of retail and wholesale/investment banking activities within universal banks to insulate UK retail banking services from investment banking risk. 


 

The Financial Stability Board announced on September 1 the formation of dedicated work streams to help gauge the case for further regulatory action in five areas associated with shadow banking, notably including securities lending and repos. 

In a September 1, 2011 speech at Clare College in Cambridge, Paul Fisher, Executive Director for Markets of the Bank of England, outlined his thoughts on ways risk taking is executed and how contracts between parties assuming these risks can have profound effects on systematic stability beyond the normal consideration of formal regulations.  In balancing public policy objectives of appropriate investor protection and systemic stability, it is important that that regulators and market participants critically evaluate their exposures, and take into account stress correlations with an eye on capturing tail events properly.

Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, explained his thoughts on redrawing the social contract between banking and society in light of the contract’s failure leading up to and during the financial crisis. According to Mr. Tucker, the traditional framework of the social contract was ill prepared to handle the realities of shadow banking and financial innovation, and hasty reregulation without first reexamining the social contract would be foolish.

At the request of the G20, on April 12, 2011 a Financial Stability Board task force on shadow banking issued its initial report, “Shadow Banking: Scoping the Issues,” laying out the current thinking of the task force on the definition of "shadow banking," "potential approaches to monitoring it, and possible regulatory measures to address systemic risk and regulatory arbitrage concerns posed by the shadow banking system.  Though preliminary in nature, this “background note” may provide some valuable clues about the nature, scope, and extent of upcoming proposals to regulate shadow banking.

In a report issued April 12, 2011, the Financial Stability Board (FSB) highlighted a number of practices engaged in by exchange-traded funds that may be sources of risk to financial stability.  Calling for greater disclosure and transparency, securities lending was among the practices red-flagged by the FSB. 

Regulators have reported the conclusions of study groups looking into the causes of, and remedies for the Credit Crisis. A consensus of opinion exists as to causes, with a growing emphasis among larger central banks on the failings of liquidity risk management. All regulators believe new forms of infrastructure will be needed to prevent a recurrence...

Legislators will be better equipped to enact appropriate reforms if their deliberations are based on meaningful data regarding hedge funds.

IOSCO: IOSCO believes that regulators should seek to develop a comparable and consistent set of data to be collected from local hedge fund managers and advisers to monitor systemic risks and prevent gaps in regulatory reporting requirements. We recognise that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.[1]

...

Regulators during the crisis were most concerned about the nearly unmanageable spike in systemic risk which, according to the IMF, FSB and BIS, is defined as "a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy."

...

Dr. Franz-Christoph Zeitler, vice president of the Deutsche Bundsbank, speaking in Frankfurt on September 24, 2009, noted the failures of  backward-looking quantitative risk measurement methods, such as value-at-risk or expected- shortfall models, which “have proved necessary but inadequate and should be supplemented by forward-looking instruments such...

Through their open market operations, the trading desks at central banks gain first-hand knowledge of evolving stresses in the inter-dealer funding markets – information which can help to monitor systemic risks.

Bank for International Settlements: A first open question pertains to the governance structure and flow of information in systemic risk regulation. The crisis has shown that central banks play a decisive role in systemic regulation. But it is not entirely clear how central banks need to be equipped to play this role. Especially where the central bank is not the bank supervisor, it is important that the goal be well defined, the instruments understood and the exchange of information with other authorities appropriate - including detailed supervisory information on individual firms.  Financial supervisors can also benefit from information collected by central banks in the context of their liquidity operations.[1]

...

In a recent speech by Norwegian central banker Svein Gjedrem, the case for broader involvement by smaller banks is laid out. Instead of the G20, Mr. Gjedrem argues that the 180-member International Monetary Fund should serve as the main decision- making body for the funding of systemic risk mitigators.

Norges Bank: The international community...

According to the Bank of England, “The lasting legacy of this crisis is too much debt held by too many sectors against too little capital.” A McKinsey study found that, since 2000, gross debt for the ten largest economies grew by US$40 trillion, or a rise of 60%. Bank leverage soared to as much as 50 times equity, as compared with a ratio of less than...

Organized exchanges and central counterparty structures are expected to lower the threat from opaque, concentrated trading networks.

Bank for International Settlements: A key way to lessen the systemic risks created by large, interconnected firms is to put in place more resilient market structures. Trading of financial derivatives on organised...

From July 2007 to March 2009, share prices for global banks fell by 75%. That erased US$5 trillion in shareholder equity. Considering all markets, McKinsey has estimated that the fall in global wealth was US$25 trillion. To put that in context, the lost wealth was nearly 45% of global GDP, or a half year’s wages for the entire working world. On that...

Although much will be expected of regulators over the next several years, it is unlikely that their budgets will be enhanced commensurately. As a result, creative affiliations will be established with the private sector, to include in-house compliance professionals and external advisors. 

U.S. Securities and Exchange Commission: We have fewer...

As recently as 4Q09, the European Central Bank was dealing with challenges in the funding markets, noting that, “Funding liquidity problems continue to bring pressure on the major banks’ operations. While the conditions have improved substantially in most funding segments throughout 2009, including the money markets, some of these institutions and...

Prior to the Crisis, it was thought that diversification of counterparty networks would work to reduce systemic risk in the financial system.

European Central Bank: The element that had been more unexpected in the current crisis is the rigour with which systemic risk has been triggered by the collective behaviour of financial institutions and...

Regulators intend to increase the flows of bilateral information so as to isolate sources of risk as well as the ability of market participants to improve their risk management and business models.

European Central Bank: Any well-functioning macro-supervisory framework needs the support of market participants, because a rigorous monitoring of...

European Central Bank: We have to succeed. At stake is not only the stability of one of the world’s largest financial systems, but also the support from the over 490 million citizens in the European Union who are watching our efforts very closely. We have counted very heavily on their support for the financial system, and they would not forgive us if...

The Swiss National Bank believes that resolution measures are needed to liquidate international banks without terminal damage to the real economy.  “Too big to fail” and “too big to rescue” are the biggest challenges facing regulators today:

Swiss National Bank: From the point of view of the FSB, the possibility of conducting an orderly resolution...

Higher capital levels are expected to form the best long-term protection, just as more liquidity will be the best buffer for short-term stresses. To insure that financial defenses are uniformly adopted, global supervisors recommend the inclusion of all business models and market domains.

International Monetary Fund: Preventive measures are needed...

Many free-market economists and politicians are concerned about the potential for loss of sovereignty when agreeing to international cooperation at a level never before considered. It may well be that the first test for many countries will be during the legislative process, when decisions must be made about enacting the recommendations of the international...

The Bank of England has called the Credit Crisis an "extraordinary period" which will have "deep and long-lasting consequences" for the global capital markets. The United States Federal Reserve has said the "the sources of the crisis were extraordinarily complex and numerous," but at the root was the Fed’s belief that banks' "risk management systems...

IOSCO members wish to collect data and create risk profiles of hedge fund managers, in order to help assess systemic risk and "inform the relevant legislative debates."

"Systemic risk has to be identified and guarded against," agrees the Bundesbank, by finding "adequate measures for indicating economic stress." Preferably, these metrics would...

Liquidity, said the Central Bank of Luxembourg, must be monitored more closely and procyclical behavior must be mitigated more effectively. The Central Bank of Norway has suggested that requirements should be established stipulating the proportion of liquid assets that a bank must hold, as well as minimum requirements for funding stability.

The...