Grygo is the chief content officer for FTF & FTF News.
Fragmented global financial regulation is still a problem that “puts competition, economic growth and financial system resilience at risk,” according to a joint paper, “The Costs of Fragmentation and Possible Solutions,” released earlier this month by the Bank Policy Institute, the Global Financial Markets Association (GFMA), and the Institute of International Finance.
Regulatory fragmentation is also not new, despite years of focus on how to resolve this problem.
“Fragmentation can undermine the progress that has been made in rebuilding the resilience of the global financial system and may result in negative consequences for economic growth and competitiveness. It can increase regulatory arbitrage, disrupt the level playing field between banks, and lead to an unintended shift of risk to less-regulated parts of the market. Fragmentation also runs the risk of undermining the purpose and usefulness of the global standard-setting processes,” according to the position paper.
Fragmented markets can be caused by the “miscalibration of global standards or excessive regulatory and supervisory divergence,” and that traps “capital, liquidity and risk in local markets,” and spurs “significant financial and operational inefficiencies resulting in additional unnecessary costs to end-users,” according to the joint paper.
The downsides of fragmentation form a long list because it can “reduce the capacity of financial firms to serve both domestic and international customers,” the report notes. It can also contribute to an increased fragility that makes markets “more brittle and less resilient.”
To turn the situation around, the policy paper is making these four recommendations:
- Identify policies that force subsidiarization: “The International Monetary Fund, FSB [Financial Stability Board] and Basel Committee on Banking Supervision should identify national rules that require financial institutions to establish local subsidiaries or restrict branch operations;”
- Reassess ring-fencing requirements: “Jurisdictions with ring-fencing requirements should review whether those rules are properly calibrated considering the post-crisis resolution framework, including resolution planning and enhanced loss absorbency requirements;”
- Improve global coordination and cooperation: “Global standard-setters and regulators should work with industry and among themselves to address fragmentation and risks introduced by inconsistencies;”
- Re-evaluate supervisory colleges and case management groups: “The FSB should re-evaluate the functioning of international colleges and case management groups. These groups are supposed to bring together regulators from different countries to oversee global financial institutions, and it would be useful to examine these initiatives and whether they are meeting this goal effectively.”
This is one of the few ongoing Ops concerns that the regulators could effectively resolve if they work together and make a commitment to change.
Read more from the report here: https://shorturl.at/59rIw
Need a Reprint?