In a pathbreaking report on reforming the international financial system in the wake of the global crisis, an international commission makes five key recommendations that they believe will enhance financial stability.
Parting company with the traditional view that regulation should be even handed for all institutions and countries, the Report of the Warwick Commission, an international body of leading academics and market practitioners, argues that there is a need for an ‘unlevel playing field’ in order to offset the tendency towards unstable behaviour in the global financial system.
A key recommendation is that in times of economic and financial boom, banks and financial institutions need to have their ability to create loans reined in, in order to avoid fuelling asset market bubbles.
Second, the Commissioners argue that financial regulators need to curtail institutions’ ability to heighten risk by mismatching the maturity of their assets and liabilities and in particular their tendency to borrow short-term against highly illiquid collateral during asset market booms.
Third, regulators must have the flexibility to apply tight regulatory requirements on institutions that threaten the stability of the whole financial system.
Fourth, going against the tide of increasing global financial regulation, the Commission argues for increased powers for national regulators in a bid to prevent banks from establishing overseas branches and regulating them from their home base. Under the host country rules recommended by the Commission, banks would have to establish an overseas subsidiary that is regulated by the local regulator.
Fifth, the Commission argues that host regulation would lead to a ‘right-sizing’ of the financial sector, so that the finance industry is not allowed to excessively dominate a country’s economy or harm national welfare systems, and the Commission suggests a system of regulatory measures to help achieve this.
The Commission was chaired by financier Avinash Persaud and was an initiative of the University of Warwick, one of the UK’s top universities. It comprised twelve commissioners drawn from universities and research institutions across Europe, North America and Asia, who met in Warwick, Berlin and Ottawa over eight months in 2009 in order to develop its recommendations, taking oral and written evidence from financiers, civil servants and academics in London, Paris, Brussels, New York and Washington.
The Report has been welcomed by a number of key policy makers.
Commenting on the Report, Adair Turner, Chair of the UK Financial Services Authority, said:
“On all the issues it addresses, [the Warwick Commission] is able to challenge conventional wisdoms, free from the constraints which inevitably influence the thinking of official authorities involved in complex international discussions... Its focus on the credit cycle as the key driver of financial and macro-economic instability is correct and crucial...”
Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission, commented:
“ The Warwick Commission is to be congratulated on taking a fresh look at the challenges facing international financial reform. The current global financial crisis demonstrated unequivocally that the world is unbalanced and will always be in a state of constant change. For this reason, the Warwick Commission tries to challenge the orthodoxy and should be congratulated for its recommendations and
suggestions for understanding that there is no self-equilibrating stability, but a dynamic evolution where we need to encourage diversity of thinking to get more balanced markets than uniform thinking that herds into one direction.”
Mark Carney, Governor of the Bank of Canada, writes:
“Refusing to treat the recent crisis as a special case, it examines the
causes of financial crises in general. With its sophisticated grasp of how the credit cycle operates, innovative reform proposals, and considered treatment of the political economy of regulation, the Report should prove invaluable to policy-makers at this critical juncture.”
Notes for Editors:
- See the executive summary of the Report, as well as the full text
- Members of the Warwick Commission, with links to biographical details
For further information, call
Avinash Persaud: +44 (0)7921 292 443
Len Seabrooke: +44 (0)7825 1934 79