Safe and Sound 

AuthorTobias Adrian and Aditya Narain

Safe and Sound Finance & Development, September 2017, Vol. 54, No. 3

Tobias Adrian and Aditya Narain

International financial regulators help ensure the safety and soundness of diverse financial systems

The 2008 financial crisis gave urgency to the multilateral effort to create a safer and stronger global financial system. Since then, policymakers have largely succeeded in the task of ensuring that the biggest international banks are more resilient to adverse shocks, reducing the risk of another financial crisis as severe as the last one. But policymakers face a new challenge: resisting pressure to roll back reforms.

Now that the postcrisis system is in the final stretch of implementation, policymakers are starting to evaluate possible unintended consequences of the reforms. The key focus will be to ensure that the significant increase in capital and liquidity of major banks around the world will not be undermined. If international regulatory standards can be adapted to apply across a wide range of banks and banking systems, it will also help get greater traction and support for the reforms.

Enhanced regulatory standards have made large international banks more resilient by requiring them to have more loss-absorbing capacity—more capital—and more cash-like assets to meet financial obligations—more liquidity. Banks are also subject to more intense supervision, required to be well prepared to manage risks to their well-being (such as a recession), and expected to have high-quality corporate governance.

If they do get into trouble, there are now international agreements on how they should be restructured or closed (resolved, in regulatory parlance) and who should bear the losses of their failure and in what manner. Progress is also being made in agreeing on how to deal with risks to the broader financial system, such as those posed by so-called shadow banks, which are not regulated like banks but engage in many bank-like activities, such as gathering funds and making loans.

Taking stockMarket participants and policymakers have noted some possibly unintended consequences of the new, postcrisis regulations. In response, several multilateral organizations are evaluating the economic impact of financial reforms. In most cases, the benefits far outweigh the costs. However, in some cases, some readjustments to regulatory reforms might lower the costs without reducing the benefits. Among the institutions that are evaluating the impact of the reforms is the Financial Stability Board (FSB), which monitors the global financial system and makes recommendations about measures to maintain its stability. The FSB includes finance ministries and central banks from about 25 countries and international financial institutions such...

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