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Changing Regulatory Standards Across the Globe and their Implications

Posted in Finance Articles, Total Reads: 2279 , Published on November 27, 2014

Since the 2008 crisis, major problems related to governance and management of financial institutions was recognized. The failure of some of the “too-big-to-fail” financial institutions led to freezing of financial markets worldwide and caused widespread contagion. The economies globally suffered shocks and it came in the form of huge costs borne by the governments of the economies, employment of the nation, economic growth, etc.

The factors that led to this situation of the world economy included poor regulation practices, too much risk taking by financial institutions, lack of oversight agencies, bad governance practices, uncontrolled liquidity creation, etc. Now, the key is to build resilient financial institutions, make derivatives markets safer, etc. One of the key legislations that has come up after the crisis if the Dodd Frank act which has created new government overseeing agencies like the Financial Stability oversight council that are designed to monitor the actions of companies or large financial organizations whose collapse can lead to a global financial meltdown. Other actions include prevention of predatory mortgage lending, changes made to restrict regulation and trading in derivatives, etc. All these measures to be implemented have also raised the accuracy of the credit rating given by agencies to these financial institutions. The more restrictive but safer framework the economy will have, more trustworthy will the banks become on the eyes of the shareholders.

Image Courtesy: freedigitalphotos.net, Stuart Miles

The aim is to prevent too much risk taking by the financial institutions. The other step of measures taken has been the progression on Basel III norms which includes minimum capital adequacy ratio, capital components (tier 1 and tier 2 capital, etc), calculation of RWA for market and operational risk. It also specified the amount of high quality liquid assets that a bank would have to hold to cover a crisis in a 30 day period. Although the reforms post the crisis are in progress of being implemented and some are in the process of implementation, not just the overseeing authorities and watchdogs but the financial institutions also need to take the required steps in accordance with avoidance of too much risk taking and betting with financial derivatives and using other complex and risky financial instruments.

In the Indian context, although RBI still governs the regulations and actions of financial bodies to a large extent as compared to the central bank control in other countries like United States, etc, the banks and even NBFCs need to have a closer look at these financial reforms emerging to keep the global economy stable. For example, India already has the CRR and the SLR to handle its capital requirements, Basel norms should also be considered in light of the global regulatory standards and see if any changes in the existing rules are required accordingly.

The boundaries encompassing banking, insurance and capital markets sectors have blurred over the past few years and this has posed problems in designing regulatory procedures. Also, financial markets across the globe have internationalized but having one set of harmonized regulations for all economies may not be very well suited for them as every nation has its own set of regulatory requirements.

This article has been authored by Sona Phogaat from SIBM Bangalore

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