Guide Banking on Basel: The Future of International Financial Regulation

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These standards deal with such issues as the safety and soundness of financial institutions, the operation of efficient and fair financial markets, and the structure and functions of financial regulatory authorities.

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These forces have also exacerbated concerns about the efficacy of the financial sector. However, the financial sector has been misallocating funds and failing to deliver the expected benefits. In addition, unemployment, poverty and inequality are increasing around the world and many societies are showing symptoms of social fragility, such as substance abuse, breakdown of families and intolerance. The fact that the operations of financial institutions, financial markets and financial regulators inevitably affect people means that they cannot avoid having human rights impacts.

Consequently, it is noteworthy that the SSBs have not developed standards for dealing with these human rights impacts. Their failure to do so increases the chances that the financial sector will under-estimate the risks and over-estimate the benefits of its activities. This in turn increases the risk that it misallocates credit and overestimates the safety and soundness of financial institutions, the efficiency of financial markets and the stability of the financial system.

This paper argues that the SSBs and their members can mitigate this risk by adopting a human rights based approach to financial regulation. In order to make this case, the paper is divided into three sections. The first provides an overview of the international financial regulatory standards. The second discusses how human rights can contribute to the work of the SSBs. The third is a conclusion. There are fifteen SSBs. Space does not permit a full discussion of all the SSBs. Consequently, the paper focuses on the three most prominent SSBs.

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They are the forums in which the regulators of the banking, securities and the insurance industries meet. They are expected to incorporate the standards that they have developed in the BCBS into their national laws and regulations. The BCBS has two prominent international standards.

Financial regulation: facing a global challenge - Paris Innovation Review

The first establishes a framework to promote the resilience of banks. The Core Principles for Effective Banking Supervision [10] stipulates 29 principles with which banking supervisory authorities should conform to if they are to effectively oversee the safety and soundness of their banks.

The principles deal with the powers and functions of banking supervisors and their supervisory responsibilities. The Insurance Core Principles stipulate 26 principles to promote an insurance supervisory authority that is independent, accountable and transparent and that can oversee a fair, safe and stable insurance industry.

Although none of the international financial regulatory standards are legally binding, there are some de facto means for enforcing them. The IMF may use this information in its policy discussions with the member state and it may influence the technical assistance the IMF and World Bank offer the member state. Financial markets offer another mechanism for de facto enforcement.

They therefore, have a responsibility to respect human rights. This means that their actions should be consistent with human rights principles. In addition, they should not do anything that undermines efforts by other actors to meet their own human rights obligations and responsibilities. The national financial regulatory authorities that participate in the SSBs are agencies or instrumentalities of sovereign states that have signed human rights treaties and that are bound by applicable customary international law principles.

Consequently, they are bound by the commitments of their home states. This includes protecting, respecting and working to fulfil human rights both in their national regulatory work and in their participation in the SSBs. Despite their human rights responsibilities and obligations, the SSBs and their participating national regulatory authorities have not addressed the human rights impacts of the financial sector. Their failure to do so is implicitly a decision to externalize the human rights impacts of their standards and the transactions entered into pursuant to them.

This in turn risks exacerbating the adverse human rights impacts of any particular standard. It is important to note that while finance can impact all human rights, there are some human rights that are implicated in almost all financial activity.

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  • These are:. A human rights based approach can benefit financial regulation by contributing to a more accurate assessment of the true costs and benefits of proposed international standards. However, by adding additional tasks to the standard-making process, a human rights approach will increase the costs of making and implementing international regulatory standards. Human rights can add value to international financial standard setting in a number of different ways. First, a human rights approach by making transparent the impacts of proposed standards on individual savers, investors and consumers of financial services helps the SSBs and their members develop a disaggregated understanding of the positive and negative impacts of any standard on the different groups of stakeholders in the standard.

    This should help them formulate standards that optimize the positive and mitigate the negative impacts of the standard on the stakeholders in the financial sector. This information should enable them to more accurately assess how well the financial system is performing all its functions, the safety and soundness of individual financial institutions, the efficiency and fairness of financial markets and the sustainability and stability of the system. Such an approach, for example, will ensure that the regulators capture the impact of the Basel standards on the ICESCR requirement that states and their agencies allocate maximum available resources to the progressive realization of ESCR.

    This information can only be garnered from an explicit human rights analysis. Second, a human rights based approach will require regulators and the SSBs to more actively engage with all the stakeholders who may be affected by a proposed standard and exchange views with them about the content of the standard and their possible responses to the standard. This increased engagement should provide the SSBs with new information that makes it easier for them to identify and address any unintended consequences of the proposed standard.

    It should also promote standards that are as responsive as possible to the needs of the regulators, the regulated entities and their customers. Why has the direction of regulation varied across the two countries?

    What’s the future of global banking regulation?

    China, for its part, experienced few direct effects, although the indirect ones were large. This contrast in itself triggered differentiated responses, but financial regulation would have varied anyway, given the huge differences in the structure and conditions of the financial sector in the two countries. This system used complicated instruments and markets that had developed over decades, including extensive use of derivatives. The pressure testing produced by the crisis highlighted quite a number of flaws in the overall system.

    As a result, the U. China largely experienced the GFC as an external event with major internal impacts, the biggest of which was a huge drop in foreign demand for its products. The economy slowed noticeably, but primarily in the same ways that it would have been affected by a major world recession triggered by a nonfinancial crisis. China had a considerably less sophisticated and complicated financial ecosystem and made much less use of derivatives and other complex instruments. At the time of the crisis, the great bulk of credit in China was provided by banks through traditional loans.

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    Further, Chinese government entities owned the large majority of the shares of the banks and significantly influenced their overall lending policies. Many of the wide-ranging changes the United States introduced were driven by the adoption of new global standards for bank capital and liquidity requirements.

    Basel Accord-Financial & Banking Regulation

    The leaders of the G20 countries, dominated by the nations most affected by the crisis, stepped forward to mandate that global standard-setting bodies lead the movement toward stronger and more effective financial regulation within member states. They empowered the Basel Committee on Banking Supervision to revise bank capital standards to be much tougher and to create a new set of quantitative liquidity requirements for banks. They also created the Financial Stability Board FSB to oversee standards for all aspects of the financial systems, including coordination with the Basel Committee.

    The biggest changes came through the Basel Committee, including: higher minimum capital ratios; tougher definitions of what counts as capital for banks; myriad technical changes that also increased capital requirements; a new liquidity coverage ratio LCR to ensure banks could survive a liquidity crisis for 30 days; and a net stable funding ratio NSFR to limit the extent to which banks could borrow short term and lend long term.

    In combination, these rules make banks substantially safer, but also increase their net cost of funding considerably. Capital levels already exceeded the new requirements in general, most of the more technical changes focused on activities that are modest in China, and the new liquidity requirements were geared to be supportive of traditional deposit-based funding models, such as those used by most Chinese banks. At the national level, Washington also legislated other major changes through the Dodd-Frank Act, covering a wide range of topics, including:.

    The Chinese response was different. Prior to the GFC, China had been moving methodically toward building a financial system that mimicked a Western model that appeared to be highly successful. The crisis caused a sharp reevaluation of the value of the Western approaches. Further, the Chinese government chose to use bank lending as the major form of economic stimulus postcrisis. Even if the Chinese had been minded to closely follow the new Western approach to tightening regulation, large swathes of these new regulations were almost irrelevant to a Chinese financial system that simply did not use the type of sophisticated instruments and approaches that had blown up in the United States and Europe.

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    The Federal Reserve's overarching aim was to become the sole lender of last resort and to resolve the inelasticity of the United States' money supply during significant shifts in money demand. In addition to addressing the underlying issues that precipitated the international ramifications of the money market crunch, New York's banks were liberated from the need to maintain their own reserves and began undertaking greater risks. New access to rediscount facilities enabled them to launch foreign branches, bolstering New York's rivalry with London's competitive discount market.

    Economists have referred to the onset of World War I as the end of an age of innocence for foreign exchange markets , as it was the first geopolitical conflict to have a destabilizing and paralyzing impact. In the weeks prior, the foreign exchange market in London was the first to exhibit distress. European tensions and increasing political uncertainty motivated investors to chase liquidity , prompting commercial banks to borrow heavily from London's discount market. As the money market tightened, discount lenders began rediscounting their reserves at the Bank of England rather than discounting new pounds sterling.

    As foreign investors resorted to buying pounds for remittance to London just to pay off their newly maturing securities , the sudden demand for pounds led the pound to appreciate beyond its gold value against most major currencies, yet sharply depreciate against the French franc after French banks began liquidating their London accounts. Emergency measures were introduced in the form of moratoria and extended bank holidays , but to no effect as financial contracts became informally unable to be negotiated and export embargoes thwarted gold shipments.

    A week later, the Bank of England began to address the deadlock in the foreign exchange markets by establishing a new channel for transatlantic payments whereby participants could make remittance payments to the U. However, pound sterling liquidity ultimately did not improve due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the world's reserve currency and leading vehicle currency , market illiquidity and merchant banks' hesitance to accept sterling bills left currency markets paralyzed. The U. By mid-October, the London market began functioning properly as a result of the September measures.

    The war continued to present unfavorable circumstances for the foreign exchange market, such as the London Stock Exchange 's prolonged closure, the redirection of economic resources to support a transition from producing exports to producing military armaments , and myriad disruptions of freight and mail. The pound sterling enjoyed general stability throughout World War I, in large part due to various steps taken by the U. Such measures included open market interventions on foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war activities, outbound capital controls, and limited import restrictions.

    The principal purposes of the BIS were to manage the scheduled payment of Germany's reparations imposed by the Treaty of Versailles in , and to function as a bank for central banks around the world. Nations may hold a portion of their reserves as deposits with the institution. It also serves as a forum for central bank cooperation and research on international monetary and financial matters.

    The BIS also operates as a general trustee and facilitator of financial settlements between nations. Twenty-five trading partners responded in kind by introducing new tariffs on a wide range of U. Hoover was pressured and compelled to adhere to the Republican Party 's platform, which sought protective tariffs to alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic unemployment rate. The culmination of the Stock Market Crash of and the onset of the Great Depression heightened fears, further pressuring Hoover to act on protective policies against the advice of Henry Ford and over 1, economists who protested by calling for a veto of the act.

    The classical gold standard was established in by the United Kingdom as the Bank of England enabled redemption of its banknotes for gold bullion. France, Germany, the United States, Russia , and Japan each embraced the standard one by one from to , marking its international acceptance. The first departure from the standard occurred in August when these nations erected trade embargoes on gold exports and suspended redemption of gold for banknotes. Having informally departed from the standard, most currencies were freed from exchange rate fixing and allowed to float.