Ben Bernanke on the US Response to the Financial Crisis…
At the Council of Foreign Relations, Fed Chairman Ben Bernanke made comments (Financial Reforms to Address Risk) that shed light on how the US regulatory environment might in the future change, including an expanded regulatory role by the Federal Reserve, and/or the introduction of “an authority specifically charged with monitoring and addressing systemic risks”.
He starts with the admission that, “…broadly speaking, the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that an inrush of capital was prudently invested.” “In certain respects, (the US) experience parallels that of some emerging-market countries in the 1990s, whose financial sectors and regulatory regimes likewise proved inadequate for efficiently investing large inflows of saving from abroad. When those failures became evident, investors lost confidence and crises ensued. A clear and highly consequential difference, however, is that the crises of the 1990s were regional, whereas the current crisis has become global.”
And then goes on to say that, “We (the US) must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,” and that “…we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing.”
Mr. Bernanke admits that “the Federal Reserve relies on a patchwork of authorities, largely derived from the Fed’s role as a banking supervisor, as well as on moral suasion to help ensure that critical payment and settlement systems have the necessary procedures and controls in place to manage their risks. By contrast, many major central banks around the world have an explicit statutory basis for their oversight of these systems. Given how important robust payment and settlement systems are to financial stability, a good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.”
Moreover, “Financial stability could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the United States. Macroprudential policies focus on risks to the financial system as a whole. Such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated in a few key areas. A macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets.”
Mr. Bernanke goes on to say that one way that macroprudential policies could be better integrated into the regulatory and supervisory system would be“for the Congress to direct and empower a (new) governmental authority to monitor, assess, and, if necessary, address potential systemic risks within the financial system.
The elements of such an authority’s mission would ostensibly include, for example,
(1) monitoring large or rapidly increasing exposures–such as to subprime mortgages–across firms and markets, rather than only at the level of individual firms or sectors;
(2) assessing the potential for deficiencies in evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products to increase systemic risks;
(3) analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms; and
(4) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole.”
Two areas of natural focus for a systemic risk authority would be the stability of systemically critical financial institutions and the systemically relevant aspects of the financial infrastructure.”
The United Kingdom and Japan’s response to the issues highlighted by the Fed Chairman was the establishment of a financial services authority whose supervision and control mandate went beyond the formal banking system to include the so-called shadow banking system” outside the formal control of the central bank.
The United Kingdom’s Financial Services Authority
The Financial Services Authority (FSA) is an independent non-governmental body given statutory powers by the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 9 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive.The FSA is accountable to Treasury Ministers, and through them to Parliament. It is operationally independent of Government and is funded entirely by the firms it regulates.
Its ARROW principal, which stands for the Advanced, Risk-Responsive Operating framework, is the heart of its risk-based approach to regulation. The FSA supervises firms according to the risks they present to statutory objectives. It assess risks in terms of their impact (the scale of the effect these risks will have on consumers and the market if they were to happen) and probability (the likelihood of the particular issue occurring). In relation to medium and high-impact firms. Their work is coordinated through a relationship manager, who carries out a regular risk assessment (on a cycle of one to four years) and determines a risk mitigation program proportionate to the risks identified. The precise volume and type of work undertaken depends on the size and riskiness of the firm concerned. For high impact firms, it applies a closer monitoring regime. This is essentially a planned schedule of ARROW visits to the firm throughout the regulatory period. This allows the supervisory team to meet the firm’s senior management and control functions regularly.
The FSA is the designated competent authority under the European single market directives for banking, insurance, investment business, and other financial services including insurance intermediation. The FSA is also the competent authority under a host of other EU directives, including the Market Abuse and Prospectus Directives. European legislation affecting the FSA is implemented domestically through FSMA and / or HMT regulations. Other main areas of FSA regulation include pension schemes and activities relating to mortgage contracts. The FSA has authorization, enforcement, supervision and rule making functions. It also has registration functions under the various pieces of legislation applicable to mutual societies and related functions under other legislation applicable to financial services and listing.
Japan’s Financial Services Agency
In 1998, Japan established a Financial Supervisory Agency as an administrative organ under the Financial Reconstruction Commission at the height of Japan’s financial crisis. The organization was later reorganized to become the Financial Services Agency (FSA) in taking over planning of the financial system for which the Ministry of Finance had been responsible. Through further organization, the FSA essentially assumed the portfolio of the Banking Bureau of the Ministry of Finance and became an external organ of the Cabinet Office, and with concurrent abolishment of the FRC, the FSA took over the business concerning disposition of failed financial institutions. It is now the parent organization for The Securities and Exchange Surveillance Commission and the Certified Public Accountants and Auditing Oversight Board. The FSA is responsible for supervising and inspecting all retail and wholesale banks, securities companies, insurance companies, investment management companies, and other non-bank financial institutions. It also supervises certified public accountants and auditing firms and surveillance of compliance rules in securities markets.
The FSA’s Inspection Bureau conducts inspections of financial institutions with the mission of examining the institutions’ compliance with regulations and risk management, to point out identified problems, and uses on-site inspections to ensure the soundness and appropriateness of financial institution operations. The Supervisory Bureau takes administrative actions based on the findings of the Inspection Bureau.
From April 2007, the FSA started full-fledged implementation of its Financial Inspection Rating System, which provides inspection results in the form of graded evaluations (i.e. ratings) that offer significant incentives for voluntary and sustained improvement in management on the part of the financial institutions. To put teeth in its inspection activities, the Inspection Bureau has proactively hired specialists from the private sector with first-hand knowledge of financial institution operations. The FSA operates through eleven regional offices.
Japan investor tokyo takes 