Monday, May 21, 2012

KPMG's Giles Williams: challenge in financial regulation is balance between growth and financial stability

In his Financial News column, KPMG's Giles Williams discusses the key challenge in developing financial regulation is to strike a balance between growth and financial stability.

He looks at the regulations that have been pursued since the beginning of the financial crisis and concludes
While the sentiment behind the reforms is right, unfortunately the financial situation we are confronted with is significantly different to how it was immediately following the crisis. The market realities of today have, in many respects, made the proposals counterproductive, and the impact and cost to the broader economy has become increasingly clear....
For banks, to date we have seen a single-minded dedication to ensuring stability, executed primarily through a focus on capital, liquidity and recovery and resolution planning. As the additional capital requirements are piled on banks, these institutions are simultaneously shrinking their balance sheets and pushing up the price of credit because of the increased cost of capital and liquidity and the repricing of risk. This comes against a backdrop where the economy needs banks to increase lending and kick-start growth.
Regular readers know that your humble blogger is not a big fan of the regulatory focus on capital, liquidity and recovery and resolution planning.  The tend to be both ineffective and expensive.

Frankly, I prefer a low cost solution that prevents the next financial crisis.  Simply require financial institutions to provide ultra transparency and disclose their current asset, liability and off-balance sheet exposure details.

Market participants are capable of using this information to assess the risk of the financial institutions and to exert discipline to restrain risk taking.

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