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Regulation and Supervision: After the Storm

February 8, 2012
  

Presenters:

Martin Cihak, Lead Economist, FPDCE
R. Barry Johnston, Consultant, FPDCE
María Soledad Martínez Pería, Lead Economist, DECFP
İnci Ötker-Robe, Chief Technical Specialist, FFSDR
  

Discussants:

Krishnamurti Damodaran, Senior Financial Sector Specialist, FFSAB
Valeria Salomao Garcia, Senior Financial Sector Specialist, FFSAB
Alain Ize, Consultant, LCRCE
  

Chair: 

Asli Demirgüç-Kunt, Director, DECVP & Chief Economist, FPD

 
Presentation:

Regulation and Supervision: After the Storm
February 8, 2012

  
Abstract:

This is the fifth in a series of seminars related to the 2013 Global Financial Development Report (GFDR). The objective of the seminar series is to present some very preliminary findings from the various studies underlying the 2013 GFDR, and to get early informal feedback. For presentations from past GFDR seminars, see http://go.worldbank.org/IA4ASX89K0.

Why “regulation and supervision after the storm”?  The overall theme of the 2013 GFDR is re-thinking the state’s role in the financial sector. Regulation and supervision — an important part of the state’s role — has received much scrutiny during the global financial crisis, and there have been important changes in regulation and supervision, both globally and in many countries. The 2013 GFDR will contain a chapter examining the early post-crisis thinking in transforming regulatory practices around the world, with focus on emerging markets/developing economies.

What is the state of regulation and supervision around the world, what has changed so far? The presenters will examine recent regulatory developments around the globe, based in large part on a new iteration of a World Bank survey of bank regulation and supervision. This unique database, to be published together with the 2013 GFDR, provides a rich data set on the state of banking regulation and supervision in more than 130 countries (for previous iterations of the survey, see http://go.worldbank.org/SNUSW978P0 ).

What are the likely impacts of the new regulations?  Implementing the post-crisis regulations will require adjustments from many financial institutions. Available estimates focus on large financial institutions in developed economies. The seminar will present new estimates of the likely impacts of the regulatory changes, focusing on emerging markets and developing countries.

What remains to be done on the regulatory front?  Much remains to be done on addressing the underlying incentive breakdowns that contribute to crises. Some of the regulatory developments, such as the increased emphasis on simpler, but well defined and harder-to-circumvent ratios, are going in a good direction. A review of literature and evidence suggests a need to further re-orient the regulatory approach to have at its core identification of incentive problems on an on-going basis. The presenters will make the case for "incentive audits" to help identify perverse incentives faced by financial institutions, market participants, regulators, supervisors and politicians, before they give rise to systemic risk. The challenge of financial sector regulation is to align private incentives with public interest without taxing or subsidizing private risk-taking. Credible threats of market entry and exit, healthy competition, and disclosure of quality information are essential in getting this balance right. 




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