Enforcement Strengthening enforcement, overall supervision of firms, corporate governance, internal risk management and remuneration incentives in firms are prerequisites for a more sustainable, safer financial system. Where were the shareholders of leading financial firms before the crisis descended? Or the boards of the afflicted companies?
Crisis management Global and European crisis management mechanisms, it is increasingly agreed, must be reinforced for cross-border banks (from prevention to intervention, to wind-up and bankruptcy). The elephant in the room is burden sharing among governments for bank bail-outs. But this has to be tackled.
Infrastructure In general, market infrastructure has stood up well. But the crisis has highlighted the need for safe clearing and settlement systems, especially where the netting of complex derivative transactions is involved. Moves to make CDS clearing obligatory through regulated clearing houses are intended to diminish counterparty risk. We must also strive for more homogeneous payment systems like the Single European Payments Area.
Consumer protection Both the EU and the US are taking measures to give consumers and small investors a louder say in financial services regulatory and supervisory discussions. Another issue, made more urgent by the post-crisis constraints on government expenditure, will be how to generate safer forms of private pension provision.
In the international regulatory arena, debate over the right policies continues. Is extra capital the right way forward? Or increased intensity of supervision? Do these issues become more acute post crisis as market concentration strengthens? Overshadowing all these are the bigger questions such as the challenge by Lord Turner, Chairman of the United Kingdom’s Financial Services Agency, as to the role of the financial system in the overall economy. As the European Commission’s President Barroso has said recently in his political guidelines for the new Commission, “…tough decisions may have to be made as regards the size and business model of restructured banks …”
There is work here for many years ahead!
David Wright is Deputy Director General, Internal Market and Services, at the European Commission.