The Perimeter of Financial Regulation
IMF Staff Position Notes, March 26, 2009
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Bibliographic details
- Authors: Luisa Zanforlin, Ian Tower, Erlend Nier, Michael Moore, Ana Carvajal, Randall Dodd
- Published: March 26, 2009
- Series: IMF Staff Position Notes
- DOI: https://doi.org/10.5089/9781455296620.004
Context and Rationale
- The G-20 has called for a review of the scope of financial regulation, reflecting concern that the coverage of prudential regulation has been too narrow.
- The paper emphasizes weighing the experience of the past two years against considerations for extending the regulatory perimeter.
- Key question: whether assumptions underlying the existing regulatory model for banks are fatally flawed, or whether better regulation and supervision of banks would be adequate.
Scope of Proposed Extensions
- Proposals imply a major increase in the scope of regulation of:
- institutions,
- products,
- markets.
- The proposals would be best advanced as part of a broad program of financial sector reform, including the development of a macroprudential framework for assessing and managing systemwide risk.
Implementation Considerations
- Any extension of the perimeter should be carefully designed to be proportionate to the risks in each new area.
- Important to understand trade-offs between:
- extending prudential coverage, and
- improving regulation and supervision within the existing banking regulatory model.
Costs, Risks, and Trade-offs
- Even proportionate new regulation will clearly increase costs to the system.
- Expected consequences include:
- an increased regulatory burden,
- risks of unintended consequences.
- The current crisis-related experience demonstrates that the cost of not addressing gaps in coverage is also high.
Subject Areas and Keywords (as provided)
- Subjects: Asset and liability management; Banking; Financial institutions; Financial regulation and supervision; Financial sector policy and analysis; Hedge funds; Liquidity; Liquidity risk; Securities; Systemic risk.
- Keywords: bank; firm; Hedge funds; Liquidity; Liquidity risk; market; market conduct standard; market discipline; market expectation; market liquidity; market participant; prudential regulation; risk; risk products; Securities; SPN; Systemic risk.