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Regulators’ Response: Crisis Framework by John Bovenzi

Regulators’ Response: Crisis Framework by John Bovenzi. Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR , INDIA. Table of Contents. Key Factors Leading to the Crisis Erosion of regulatory standards

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Regulators’ Response: Crisis Framework by John Bovenzi

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  1. Regulators’ Response: Crisis FrameworkbyJohn Bovenzi Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

  2. Table of Contents • Key Factors Leading to the Crisis • Erosion of regulatory standards • Structural weaknesses • Today’s Policy Agenda • Strengthen supervision and regulation • Address systemic risk • Looking Forward

  3. Key Factors Leading to the Crisis: Erosion of Regulatory Standards • Weak Capital Standards/High Leverage • Amounts, quality and cyclicality of capital • Weak Liquidity Standards • High levels of uninsured short-term funding susceptible to panic • Deposit insurance is a necessary, but not a sufficient condition • Weak Underwriting Standards • Low down payments, weak documentation, etc. fuel excessive lending and housing bubble • Consumer, business and government debt levels • Fuels boom-to-bust cycles

  4. Key Factors Leading to the Crisis: Structural Weaknesses • Complexity, Lack of Transparency • Lack of trust contributes to panic • Inability to differentiate between institutions • New market instruments contribute to the downward spiral in the value of collateral once the bubble bursts • Gaps in Financial Regulatory Oversight • Shadow banking system – MMMFs, SIVs, etc. • Interdependencies/Systemic risk

  5. Today’s Policy Agenda (1) • Strengthen Bank Supervision/Regulation • Capital standards, Liquidity standards • Volcker rule • Consumer/Investor protection • Address Systemic Risk • Systemic risk regulator • Higher regulatory standards for SIFIs • Develop effective bank resolution mechanisms • Better cross border coordination • Central clearing houses for OTC derivatives

  6. Today’s Policy Agenda (2) • Enhance Market Discipline • Greater transparency • End Too-Big-To-Fail • Housing Reform? • Government support for Fannie/Freddie • Loan Modifications/ Foreclosures

  7. Looking Forward • We are at the early stages of financial reform implementation – unclear whether long-term or short-term perspectives will prevail • There will be many unintended consequences as reform measures are implemented • One likely result will be a smaller, more expensive, financial system • Financial crises will remain a fact of life • Regulators will need sufficient authority and flexibility to deal with these events

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