Finish the Job on Financial Regulation


GFSRBy José Viñals

Brisbane and Basel may be 10,000 miles apart, but when it comes to financial regulation the two cities will be standing cheek by jowl.

At the next summit of the Group of Twenty advanced and emerging economies, to be held in Brisbane in November, political leaders will take the pulse of the global financial regulatory reform agenda, launched five years ago. The explicit goal of the Australian G-20 presidency is to finally complete these essential reforms. As Prime Minister Tony Abbott said today in Davos, “Financial regulation is always a work-in-progress, but these reforms now need to be finalized in ways that promote confidence without eliminating risk.”

I strongly support this extra push to create a safer financial system that can better support the needs of the real economy, and better protect taxpayers. For far too long, critics have been able to portray the G-20 reform agenda as a regulatory supertanker stuck in the shallow waters of technical complexity, financial industry pushback, and diverging national views. This image is increasingly off the mark.

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Financial Reform: What Must Be Done


By José Viñals

Financial system reform has reached a critical point around the world. Pressure is building from the financial industry to slow reform and concerns about fiscal conditions risk drawing public and political energies away from the need to act on financial sector problems. Fortunately, the Group of Twenty (G-20) reaffirmed its commitment at a summit in Toronto on June 26-27 to a comprehensive reform agenda—and we must seize the moment.

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Too Important to Fail?


By José Viñals

Over the past two years, disruptive failures, shotgun marriages, and government bailouts of some household names in the financial industry have placed the age-old issue of “too big to fail” at the center of financial sector policy discussions. As well, the Lehman bankruptcy and government support for AIG extended the “too-big-to-fail” notion from banks to include nonbank financial institutions. And in some cases, the financial institutions in distress were not even particularly big; rather, they were too interconnected, and too important for the functioning of the global financial system, to be allowed to fail.

We need to think about how to deal with such “too-important-to-fail” institutions for at least three reasons. 

  • When institutions are provided with implicit (and explicit) public support, they are apt to take on riskier activities than they otherwise would, with the knowledge that the government will step in if those risks turn out badly. This is called moral hazard
  • Well-run institutions are forced to compete with institutions that are implicitly guaranteed—or even directly financially supported—by the government. This makes for an unlevel playing field in the financial sector. 
  • Government support absorbs valuable public resources, arguably at the expense of more equitable and productive public spending; it could also endanger the fiscal stability of a country.

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