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2. Definition « Process of authorising, regulating and supervising financial markets and financial institutions themselves » Davis & Green Why regulate? ▪ Financial markets have become bigger/ + complex/ + inter/ + concentrated ▪ Banks & FI : Big part of the real economy ▪ Possible dysfunction of the financial system ▪ Externalites caused by financial activities Objectives of financial regulation ▪ Improve information ▪ Promote financial stability (systemic risk) ▪ Maintain or enhance competitiveness of the financial sector 2

3. Regulators International G20 / WB / IMF / WTO … In Europe  ECB  European Supervisory Agencies  European banking Authority  European Securities & Markets Authority  European insurance and occupational pensions authority  Financial stability board 3

4. Regulators In USA  Fed  State authorities  Federal Deposit Insurance Corporation  Office of the Comptroller of the Currency 4

5. Regulation acts Lamfalussy Procedures  To design the rules of the EU financial sector Dodd-Franck Act (July 2010) – USA : -Promote stability -Increase transparency and accountability in financial sector -Prevent bail-outs with public money and end « too big to fail » -Protect consumers against bank failures & abusive practices Vickers recommandations – UK  Intended to minimise risk of credit crunch 5

6. Regulation acts Basel I  Set harmonised K ratio for the stability of the banking system Basel II  Improve minimum K requirements  Supervision  Transparency and market disclosure Basel III ▪ Improve loss & shock absorption capacity ▪ Improve risk management and governance ▪ Strengthen banks’ transparency & disclosure 6

7. Lot of causes  Macroeco factors : loose mo po & global financial imbalances causing large K inflows  Multiple failures by many FI  Excessive leverage ratio to grow balance sheet & generate business volumes  Excessive recourse to wholesale & short term funding & insuficient focus on liquidity risks  Insufficient K levels  Uncontrolled securitisation  Lack of transparency & use of off-balance sheet techniques  Governance failures  Mistakes by « surveillance agents » : rating agencies/audit firm  Inadequate regulatory framework of banks & shadow banking 7

8. This is not really about the level of regulation, This is more about the structure of the financial system itself 8

9. LEVEL OF REGULATION : More ? LIKE WHAT ?-Rules Labour laws Company laws on corporate governance Competition law rules Accounting rules -K & liquidity requirements (Bks/Invt Bks) -Restrictions on acquisition of certain assets -Separation of deposit banks and Investment banks CONSEQUENCES Reduce risk but potentially trigger or exacerbate economic difficulties or funding pb for bks Make the rise of K/assets more difficult BASEL III : illustrationLeverage ratio / 2 Liquidity ratios / + K requirements / Additional risk-based rules 9

10. LEVEL OF REGULATION : Less ?  Law of profits & speculation : More money  The system can’t regulate itself : Crisis !  Huge cost of regulation  Ex : Separation of deposit banks and Investment banks  Regulation is not homogeneous 10

11. THE STRUCTURE OF THE FINANCIAL SYSTEM  Dematerialisation of financial operations : they are not aimed at the real economy  Disequilibrium between virtual economy and real economy  Regulation & supervision not adapted  Uniformisaition of behaviours vs diversity of institutions  Too much concentration of banks & interdependence  Sectors not regulated : hedge funds & securitisation- Paradox  The deposit banks and Investment banks are not separated  Size and power of banking lobbies : Block the reinforcement of regulation authorities  Conflict of interests : Rating agencies  Serious ethical lapses : fraud / defaults …  Lack of coordination at an international / European level 11

12. General Trend : More regulation  French trend : a willingness to change with the Moscovici law The market is not an end in itself but the best way to reach economic efficiency, only if the market is regulated in the public interest. In order to accomplish this, we need a system « based on common sense, courage and imagination to serve social justice & wealth creation » * rather than on new regulation rules. We are in a consumer society where « only the power of money is recognised » * Maria Nowak, l’Espoir économique 12