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The Financial Crisis and the future of regulation

The Financial Crisis and the future of regulation. Onno de Beaufort Wijnholds 15 th Dubrovnik Economic Conference June 25 , 2009. A Global Crisis. The crisis is global and needs a global solution (G20) After US, Europe and Japan, emerging economies hit hard

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The Financial Crisis and the future of regulation

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  1. The Financial Crisis and the future of regulation Onno de Beaufort Wijnholds 15th Dubrovnik Economic Conference June 25 , 2009

  2. A Global Crisis • The crisis is global and needs a global solution (G20) • After US, Europe and Japan, emerging economies hit hard • IMF back in business: so far 8 CEE countries have credit line • Governments have been proactive , but more may be needed • Lessons from the past: resolve financial crises swiftly Q: Should EU publish stress tests?

  3. Main Causes • Single most important: massive failure of risk management in private sector • Magic of Wall Street was chimera • Internal risk management seems to fail every 10 years • Originate and distribute business model seriously flawed • Securitization morphed into toxification of assets (splicing and dicing)

  4. Main causes (2) • Aided and abetted by rating agencies • Leveraging reached ridiculous levels; EU banks sometimes even outdid US • Amazing failure to recognize danger of CDS (Buffett: weapons of mass destruction)

  5. Role of Supervisors, Central Banks, IMF • Supervisors behind the curve and unable/unwilling to intervene • Excessive deregulation, pushed by politicians • Lax monetary policy; Fed hands off on asset prices • IMF: not completely blameless. No FSAP for US.

  6. Policy lessons and reforms • Overhaul of regulation needed; should last > 20 years • Not just plumbing/wiring, but comprehensive renovation of building • Systemic risk evaluation major improvement. Major role for Fed and ECB? • US proposal promising, but already compromises, e.g. no single agency • EU proposals to go further? ; level playing field • International coordination of the essence • Monetary policy to take account of asset bubbles • IMF to be more proactive on financial issues

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