Regulatory reform in banking 10 years after the financial crisis

Abstract

The reform of the international banking regulation initiated after the financial crisis of 2007–2008 should be completed this year (2017). The effort has already achieved tangible results in the areas of capital, liquidity and recovery/resolution regimes. The work has progressed amid discussion about the level playing field, the calibration of the rules, the reliance on financial risk models and the issue of culture and conduct in banking. This paper reviews this discussion and concludes that supervisors should play an active role in ensuring a competitive environment for international banks. Second, regulators should close the accord rapidly, yet on the basis of a broad consensus, and move on to address new developments in finance, such as FinTech. At a more fundamental level, the article argues that a complex system of backstops and floors based on standardised approaches is not the best way to deal with the potential underestimation of risk by banks’ internal models. Finally, it extends the epistemological analysis of models to corporate behaviours to conclude that a blend of governance and management tools are needed to foster the desired conduct, over and above compensation frameworks.