11.4 Reforms and Preventive Measures in the Global Financial System
3 min read•july 22, 2024
The global financial system underwent significant reforms after the 2008 crisis. These changes aimed to strengthen regulation, improve crisis management, and address systemic risks. Key areas included tougher capital requirements for banks, better oversight of derivatives, and enhanced international cooperation.
International institutions play crucial roles in this reformed system. The IMF monitors global stability and provides crisis lending. The supports in emerging economies. The BIS sets banking standards, while the FSB coordinates global reforms and assesses risks.
Key Reforms and Institutions in the Global Financial System
Key areas of financial reform
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Strengthening financial regulation and supervision involves increasing capital requirements for banks to ensure they have sufficient buffers to absorb losses, implementing (scenario analysis) and risk assessments to identify potential vulnerabilities, and enhancing and disclosure standards to improve market discipline
Improving crisis management and resolution frameworks entails establishing clear procedures for handling bank failures and resolutions, such as that require creditors to bear losses and reduce the burden on taxpayers
Addressing systemic risk and interconnectedness focuses on monitoring and regulating that pose risks to the broader financial system, and developing (countercyclical capital buffers) to mitigate systemic risk
Reforming over-the-counter (OTC) derivatives markets aims to increase transparency and standardization of derivatives contracts (), and requiring central clearing and reporting of derivatives trades to reduce
Enhancing international cooperation and coordination involves strengthening the role of the in setting global standards, and promoting information sharing and joint supervisory efforts among national regulators
Role of international financial institutions
(IMF) plays a key role in conducting surveillance and monitoring of global , providing financial assistance and crisis lending to member countries (balance of payments support), and offering technical assistance and capacity building for financial sector reforms
World Bank Group supports financial sector development and strengthening in emerging economies, promotes good governance and institutional reforms, and provides financing and tools for infrastructure projects (project finance)
serves as a forum for central bank cooperation and research, sets international standards for banking regulation such as the (), and monitors global financial markets to identify potential risks
(FSB) coordinates and oversees the implementation of global financial reforms, identifies and assesses systemic risks in the global financial system, and promotes information sharing and best practices among member jurisdictions (peer reviews)
Effectiveness and Challenges of Financial Reforms
Effectiveness of regulatory measures
Increased resilience of the banking sector due to higher capital buffers () and improved , enhancing the ability to absorb losses and withstand stress
Greater transparency and market discipline resulting from improved and reporting standards (IFRS 9), leading to better informed investors and more efficient market pricing of risk
Limitations and unintended consequences include the potential for regulatory arbitrage and migration of risk to less regulated sectors (), increased compliance costs and reduced profitability for financial institutions, and potential for reduced lending and economic growth due to tighter regulations
Ongoing challenges and emerging risks such as the adaptation of and technology (fintech, crypto-assets), and sustainability concerns, and and shifts in the global economic landscape
Challenges in cross-country reform coordination
Differences in national regulatory frameworks and priorities arising from varying levels of financial development and market structures (bank-based vs. market-based systems), and political and economic considerations influencing reform agendas
Regulatory fragmentation and potential for arbitrage due to inconsistencies in the implementation and enforcement of global standards, creating opportunities for financial institutions to exploit regulatory gaps and loopholes (offshore financial centers)
Coordination and cooperation challenges in aligning interests and reaching consensus among diverse jurisdictions, and limited enforcement mechanisms and sanctions for non-compliance
Balancing national sovereignty and global financial stability involves tensions between domestic policy objectives and international commitments, and resistance to ceding control over financial sector policies to supranational bodies
Capacity constraints and resource limitations, particularly in developing countries, with inadequate technical expertise and institutional capacity, and insufficient funding and resources for effective implementation and supervision of financial reforms