The financial sector needs to be treated differently - and requires new
standards
"The rapidly cascading sequence of events that followed the bankruptcy of Lehman Brothers in
"The problems of Wall Street can quickly become those of Main Street if banks are unwilling or unable to lend to businesses and consumers. That is the situation we faced in the autumn of 2008, and central banks and governments needed to intervene in the financial system using the nation's balance sheets to restore confidence."
The near-collapse of the international financial system in the autumn of 2008 offers two specific lessons to prevent a recurrence. First, the financial system plays a special role in a market-based economy. Second, regulatory frameworks need a careful and indepth review, so that the global and national financial systems are operated responsibly to serve a wider interest.
The regulatory frameworks for the global and national financial systems need a careful and in-depth review and adjustment. Three areas emerge as priorities.
- Capital requirements - Capital requirements should be increased to better represent the "real" risk underlying various securities, and this should be accompanied by better due diligence to understand the risks. Issuers of structured products should also maintain a larger ongoing exposure to their own products. - Transparency and accounting rules - Efforts to redesign regulation should focus on rules that improve the transparency of the risks being securitized. Also, new accounting rules should require hedge funds to report risk positions on their balance sheets on a timely basis. - Incentive schemes - Compensation incentives in financial institutions are largely driven by short-term returns that often are associated with larger risk-taking. Therefore, financial incentives should be changed so that they reward fund managers based more on their long- term performance and less on their short-term returns.
This publication is part of the Conference Board's series Lessons from the Recession and Financial Crisis. The Conference Board's Forecasting and Analysis team has examined the developments of the past year and has drawn key lessons for the world and for
For further information: Brent Dowdall, Media Relations, Tel.: (613) 526-3090 ext. 448, E-mail: [email protected]
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