By Michael Pomerleano
In response to the global financial crisis that began in mid-2007, governments around the world are introducing reforms designed to address the way financial markets operate. Although it will take many years to implement the multitude of rules and regulations, we know the contours and can focus on the question of whether the changes will instill a safer system. The answer is likely to be a disappointing no.
To date, reform in financial regulation and supervision has focused mainly on large, regulated institutions. Three examples are the just announced Basel III capital rules, much of the US Dodd-Frank Act, and the US Federal Reserve’s revamping of its large holding company supervision.
Some attention has also been paid to the systemic source of risk, notably in Dodd-Frank’s provisions for prudential supervision of payments, clearing, and settlement systems. Yet, shoring up the capital of the banking system is equivalent to fortifying the Maginot Line while the financial system has changed.