THE Financial Stability Board (FSB) also brought to the Brisbane summit a report on identifying systemically important financial entities other than banks, insurers and financial-market infrastructure. As yet, the basis for identifying systemically important asset managers, finance companies and other such financial institutions remains vague. Considerably more thought needs to be given to the regulatory measures that would follow from the designation of any such institutions as being of systemic importance: the FSB will need to focus more on the potential causes of the next crisis, be this from different threats to banks, such as fraud, systems failures and cyber security, or from nonbank activities within the financial sector.
As these comments suggest, many difficult issues remain unresolved. The financial sector continues to suffer from uncertainty about the regulatory reform agenda.
Higher capital and liquidity requirements are known and accepted, but many other issues remain open and unresolved. The Group of 20 (G-20) and the FSB must now aim to provide a more certain environment in which financial institutions—and their customers—can operate, by pressing harder for greater global consistency to avoid the complexity, cost and distortions of inconsistent regulations globally and across sectors; and by more ruthless prioritization of regulatory reforms.
We have argued elsewhere, particularly in Europe, regulation that may have moved beyond the “tipping point” at which the costs of additional regulation exceed the benefits: the net impact of further regulation on economic growth may already now be negative.
Conclusion
The G-20 has placed an understandable emphasis on increasing the safety, soundness and resilience of the financial system. But there comes a point where the costs of moving ever further in this direction—the potential for higher costs and reduced availability of financial products and services, in addition to the localization and fragmentation that arise from the inconsistent implementation of regulatory reforms across jurisdictions, and the continuing uncertainty over the end point—may outweigh the benefits of reducing the probability of another financial crisis.
We believe that now is the time for regulators to regroup and be bold in:
- Focusing on the cumulative impact of regulation on the financial sector and on the wider jobs and growth agenda;
- Reevaluating the cost-benefit analysis of some regulatory reforms
- Prioritizing the remaining initiatives, and providing greater certainty on the substance and timing of these remaining initiatives; and
- Reducing inconsistencies in the implementation of international regulatory standards.
Meanwhile banks, in particular, need to intensify their efforts to introduce cultural and behavioral change, to restore public confidence in the sector. It is time for the industry to rise to this challenge. But it is also important for the regulatory authorities to take a moment and assess the cumulative impact of the financial stability measures undertaken to date.
****
The article is written by Giles Williams of KPMG in the UK, Pam Martin of KPMG in the US and SimonTtopping of KPMG in China.
R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.