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WILMARTH, JR. ARTHUR E.

Abstract

The ongoing financial crisis—widely viewed as the worst since the Great Depression1—has inflicted tremendous damage on financial markets and economies around the world.2 The crisis has revealed fundamental weaknesses in the financial regulatory systems of the United States (“U.S.”), the United Kingdom (“U.K.”), and other European nations, making regulatory reforms an urgent priority. Publicly-funded bailouts of “too big to fail” (“TBTF”) financial institutions have provided indisputable proof that (i) TBTF institutions benefit from large explicit and implicit public subsidies, and (ii) those subsidies undermine market discipline and distort economic incentives for large, complex financial institutions (“LCFIs”).3 Accordingly, a primary objective of regulatory reforms must be to eliminate (or at least greatly reduce) TBTF subsidies, thereby forcing LCFIs to internalize the risks and costs of their activities.

MIYOSHI TOSHIYUKI

Abstract

The financial world has gone through a historic period since the bankruptcy of Lehman Brothers, and there have been a number of significant policy developments. The worst time may have passed, owing to bold, coordinated policy response by national authorities and international institutions such as the Financial Stability Board (FSB) and the International Monetary Fund (IMF). Accordingly, the focus of the discussions seems to have shifted from emergency response to medium-term reform of financial regulation.

W. MARKHAM JERRY

Abstract

The subprime crisis focused much attention on credit default swaps (CDS) and the role they played in the failure of the American International Group Inc. (AIG). The bailout of AIG by the U.S. government was unprecedented in size and scope, and the amount of the bill to the taxpayers for that and other failures is yet to be tallied. The U.S. government, and those in Europe, are seeking to regulate the previously unregulated CDS market. To date, that effort has focused on the creation of central clearinghouses for CDS, which, it is hoped, will lead to greater transparency.1 The development of such clearinghouses is supported by the derivatives industry, and several clearinghouses have already been formed to carry out this activity. “Legacy” swaps are being registered with those clearinghouses and plans are underway for listing new originations. More troubling to the industry is the Obama administration’s request for broader, more intrusive, indeed pervasive, regulation of CDS by the Securities and Exchange Commission (SEC) and other over-the-counter (OTC) derivatives by the Commodity Futures Trading Commission (CFTC).2

YOTSUZUKA TOSHIKI

Abstract

How did Japan avoid the great credit market boom and bust of the 2000s, which plagued so many other advanced economies? What were the factors that mitigated dangerous excesses in its domestic structured credit markets? What were the factors that limited its investments in foreign structured credit products? Why have Japanese investors had so much appetite for other types of structured products? What are the risks from those non-credit products? Were regulatory responses effective? Did Japan’s Basel II implementation contribute to the reduction of systemic risk? These are the questions I will try to address in this paper.

M. BEALE LINDA

Abstract

The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.1

H. NEIMAN RICHARD

Abstract

In the wake of the financial crisis, an effective framework for cross-border supervision of financial institutions has become an even more compelling imperative. Financial and technological innovation has rapidly interconnected global markets, but our supervisory infrastructure failed to keep pace. And the idea of one supranational global regulator—whether you would consider it a dream come true or a nightmare—remains only imagined. So how should we move forward as an international community? What strategies will best promote financial stability through cross-border supervision that is conducted primarily by national regulators? I believe the answer is threefold:

ATIK JEFFERY

Abstract

Basel II mandates the maintenance of bank capital to address three broad categories of risk: credit risk, market risk and operation risk. Basel II methodology assumes that credit risk can be reliably specified with respect to particular asset categories. These projections are based on historical experience, reflected in data sets, which are at times general and at times specific to a particular institution. Basel II may have failed, however, to identify the strong shift in the correlation of defaults that accompanied the financial crisis. Market risk assessment displays similar issues of under-anticipated correlation under extreme conditions. Of the three categories, operational risk is the least tractable. It is a catch-all category, reflecting both internal failures and external events. The character of risk shifts markedly between “ordinary times” and extreme events. Consider this matrix:

YOSHINO NAOYUKI and TOMOHIRO HIRANO

Abstract

The recent subprime loan crisis has taught various lessons. First, the procyclicality of the Basel capital requirement has been strongly recognized. It has caused Japan to suffer for so long after the burst of the bubble in 1991. When the economy was faced with a downturn, banks tended to lend less because their capital declined. A credit crunch was one of the causes of the slow recovery of the Japanese economy in the 1990s. Secondly, banks reduced their lending to small and medium sized enterprises (SMEs) and riskier businesses during the economic recession. For Asian countries, SMEs have formed quite an important sector. They have been mainly financed through the banking sector and are vulnerable to financial crises. Therefore, the stability of bank lending is quite important in Asian economies where bank loans dominate in the financial market.

BOLGER RITA

Abstract

In the wake of the financial crisis, countries across the globe have put in place or are considering new regulatory regimes designed to produce greater accountability, transparency and oversight for credit rating agencies. But as new regulations are developed, questions have surfaced. What are the goals of such regulation? How does one create a framework that avoids regulatory arbitrage? What can be done to reduce undue reliance on ratings?

KÜBLER FRIEDRICH

Abstract

I am deeply honored and pleased by the invitation to present my observations regarding the European initiatives for the regulation of nonbank financial institutions to this distinguished audience. The topic confronts us with several difficulties. One is how to define nonbank financial institutions. So far there exists no agreement, what a bank is; most European legal systems operate with a definition which is considerably broader than the one used in the U.S.1 But this and other questions of drawing lines appear to be less relevant since the EU Commission in April 2009 presented the proposal for a “Directive on Alternative Investment Fund Managers,” abbreviated AIFMD.2 This proposal narrows the scope of my investigation. It explicitly excludes insurance companies, “credit institutions” and mutual funds;3 they are all subject to existing regulation4 like the UCITS-Directive;5 UCITS being the abbreviation for “undertakings for collective investment in transferable securities,” this is the official definition of mutual funds. The proposal equally excludes the management of pension funds and of “non-pooled investments” such as endowments, sovereign wealth funds or assets held on own account by credit institutions, insurance or reinsurance undertakings.6 The proposal contains a list of the institutions that should be regulated; the enumeration includes hedge funds, private equity funds, real estate funds, commodity funds, infrastructure funds, funds of hedge funds and “other types of institutional funds” like venture capital funds.7 The debates preceding and following the publication of the proposal indicate that the primary targets are hedge funds and—to a lesser degree—private equity funds.8 My paper will first present the content of the proposal. It will then give a short summary of the conflicting views and interests shaping the public debate. In a next step I shall briefly report the legislative reasons or policy objectives motivating the Commission and explained in a lengthy Commission Staff Working Document called “Impact Assessment.”9 Then we have to look at the costs that the implementation of the proposal would entail. From there we look to the other side of the cost-benefit-analysis, followed by a short conclusion.