by Don Alexander, MBA Associate, RSD Solutions Inc. The global financial system is facing a number of especially complex changes and challenges. This uncertain environment has prompted calls to reconsider or weaken financial reform and for it to take a back seat to more immediate concerns, such as sovereign risk, weak global growth and inflation risk. In this view, financial institutions and regulators are being asked to do too much, too soon. Jaime Caruna, BIS General Manager addresses some of these issues in a recent speech Building a Resilient Financial System (Speech, Feb.7th). He notes with the current uncertainty and vulnerabilities makes it all the more important to strengthen global financial institutions and establish a reform agenda to avoid further unexpected strains. As a result, authorities and banks should move faster and further to create a more robust financial system rather than taking the maximum time to achieve minimum capital strength. A recovery is based on a stable financial system so that business and households can invest and spend with confidence. A number of broad principles guide this work. First, financial stability is about resilience and should be prepared in advance. Second, preserving financial stability involves a wide range of policy areas. Third, a globalized financial system requires global rules. And fourth, stay focused on the end result, namely a system characterized by less leverage, better liquidity management, sounder incentives, less moral hazard, stronger oversight, and more transparency. With this in mind, the appropriate timetables can be established, and their implementation monitored for unintended consequences. The key challenges in carrying forward this agenda are: (1) implementing what has been agreed, especially with regard to bank capital; (2) designing the right transition given a still weak recovery; (3) completing the regulatory reform agenda, notably in the areas of liquidity standards, resolution regimes, OTC derivatives, and the shadow banking system; and (4) ensuring sound micro- and macro prudential oversight. Authorities have a challenge for completing the regulatory agenda, establishing macroeconomic stability at a global level, reducing debt back to sustainable levels, normalizing monetary policy and continuing to guide the recovery. All three elements of policy – fiscal, monetary and prudential – are needed to work together to deliver a strong, sustainable global growth. A question becomes what is the cost of this effort? The Institute of International Finance, in their recent report The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework (Sept. 2011), suggests that impact of these changes will be a global loss of output of 3.2% GDP through 2020 (assumptions and results differ across countries). This contrasts to recent BIS and IMF estimates (BIS Macroeconomic Assessment Report 2010 & 2011and IMF WP Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements 2011)suggest the impact is much smaller or a loss of global output of 0.5-0.6% GDP through 2020. Alternatively, what is the cost of doing nothing? For more on this follow the link: www.bis.org/speeches/sp120208.pdf
