Post-crisis international financial regulatory reforms: a primer

BIS Working Papers  |  No 859  | 

23 April 2020

by  Claudio Borio, Marc Farag and Nikola Tarashev

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 |  69 pages

https://www.bis.org/publ/work859.pdf 

Focus

We review the bank and CCP international regulatory reforms implemented after the Great Financial Crisis (GFC). The reforms have sought to bolster financial stability through both improved and new standards.

Contribution

We ground the review on a unified analytical framework. The key notion is "shock-absorbing capacity". The framework allows us to discuss both individual "trees" (standards) and how they come together to shape the regulatory "forest".

Findings

First, the post-GFC reforms have greatly strengthened the financial system. They have improved the quantity, quality and timeliness of the loss-absorbing resources supporting financial stability; they have increased the robustness of standards to mismeasurement and misreporting of risks; and they have addressed systemic ("macroprudential") concerns head-on. Second, the system's shock-absorbing capacity depends strongly on how individual standards interact, in some cases reinforcing each other, in others giving rise to tensions. Third, there still are "barren patches", or areas that deserve authorities' further attention. This reinforces the need for a conservative regulatory approach.

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Abstract

This paper reviews post-crisis financial regulatory reforms, examines how they fit together and identifies open issues. Specifically, it takes stock of the salient new features of bank and CCP international standards within a unified analytical framework. The key notion in this framework is "shock-absorbing capacity", which is higher when (i) there is less exposure to the losses that a shock generates and (ii) there are more resources to absorb such losses. How do the reforms strengthen this capacity, individually and as a package? Which areas merit further attention? We argue that, given the political economy pressures and technical obstacles that the reforms have faced, as well as the inherent uncertainty about the reforms' effects, it is important to maintain a conservative regulatory approach. A higher cost of balance sheet space is a healthy side effect of the backstops underpinning such an approach.
JEL classification: G21, G23, G28.
Keywords: bank regulation, CCPs, asset managers, macroprudential.