Global financial crisis and the regulatory environment: where do we go from here? (President's message)

Global financial crisis

Should more supervisory information be publicly disclosed?

Within our financial system, a bank’s prospects and viability depend on its ability to attract investors and customers. This fundamental need means that banks and bank management must operate under the framework of market discipline and in a manner that meets the dictates of market participants. In other words, market discipline serves as the principal force influencing the performance of our financial markets.> In a speech given at the Federal Reserve Bank of Chicago’s Annual Conference on Bank Structure and Competition, Mr. Hoenig explored how the financial revolution we are now experiencing is clearly increasing the importance of market discipline in banking. Most notably, the removal of many traditional bank regulatory restraints and controls over the past few decades is expanding the role of the marketplace in allocating financial resources, encouraging innovation, and exerting discipline over banks.> However, as the importance of market discipline is increasing, an essential prerequisite for effective market discipline–timely and accurate information to guide market participants–is becoming more difficult to achieve, even with the many advances we are making in processing and analyzing financial data. Consequently, a critical goal for us to explore is how to enhance market discipline by providing market participants with adequate, timely, and accurate information for making decisions. Mr. Hoenig’s comments focus on what bank supervisors might be able to do to improve market access to information on banking organizations and to thereby enhance financial market discipline.Bank supervision

Rethinking financial regulation

In recent years, revolutionary changes in financial markets, combined with incidents such as Barings and Daiwa, have revived concerns about the adequacy of financial regulation. Historically, financial regulatory policy has been driven by the view that to maintain the health of the financial system you must maintain the health of individual institutions.> In light of ongoing changes in financial markets, however, extending the traditional approach to financial market regulation may not work. Extending the traditional approach may be too costly and difficult, especially for large, globally active institutions, because of the complexities of many new activities and financial instruments. Given these difficulties, it seems appropriate to ask whether there is an alternative regulatory approach to promoting financial stability and protecting government safety nets without sacrificing efficiency or stifling innovation.> In an article based on comments made at the annual World Economic Forum in Davos, Switzerland, Mr. Hoenig provides some thoughts on possible alternatives. First, instead of regulating to make institutions fail-safe, an alternative approach would be to strengthen the stability of the financial system by designing procedures that prevent large interbank exposures in the payments system and interbank deposits. Second, although moral hazard problems can be contained through traditional regulatory approaches, an alternative would be to require those institutions that engage in an expanding array of complex activities to give up direct access to government safety nets in return for reduced regulation and oversight.Bank supervision ; Financial institutions ; Financial markets

Maintaining stability in a changing financial system: some lessons relearned again?

Over the past three decades, we have experienced an increased number of financial crises in many countries around the world. These crises have taken place in many different parts of the financial system, including: banking and payments systems, housing finance systems, securities markets, and currency markets. Central banks and other authorities charged with maintaining financial stability have drawn important lessons from each of these crises and have instituted regulatory and policy changes that have helped strengthen the financial system in the wake of these crises. ; Despite our best efforts, financial crises have continued to return in modified form, requiring ongoing vigilance. Moreover, the task of maintaining financial stability has become more difficult over time because of the changing structure of the financial system. Unfortunately, we have not adapted our regulatory and policy framework at the same speed as financial market developments. ; In a speech made before the High Level Meeting on Regulatory Capital and Issues in Financial Stability in Sydney, Australia, last November, Mr. Hoenig used the recent subprime mortgage crisis to motivate a broader discussion of how we can maintain financial stability in a changing financial system. While the recent crisis has revealed some new and unexpected vulnerabilities in the financial system, it has also highlighted the need to remember some of the lessons we have learned from past crises.Financial markets ; Financial crises

The Federal Reserve Open Market Committee: President's message.

Federal Open Market Committee

Central Bank session comments

Debit cards ; Credit cards ; Payment systems

Twelve banks : the strength of the Federal Reserve

Federal Reserve banks

Financial industry megamergers and policy challenges

In the past few years, the pace of consolidation in the banking industry has accelerated, and combinations between banks and other financial service providers have become increasingly prevalent. In some countries, consolidation has resulted from the need to eliminate weak or problem institutions. More generally, however, the unprecedented wave of merger activity in financial services is being driven by powerful changes in telecommunications and information technology and by the removal of legal and regulatory barriers to national and international linkages. An important recent development is a change in the scale of financial industry mergers. Indeed, the size of these business combinations has increased to the point that, both in the United States and Europe, "megamergers" are reshaping the structure of the financial services industry.> Financial megamergers raise a number of important public policy issues. Some of these issues are very familiar and apply equally to megamergers and to more traditional mergers between financial service providers. For example, regulatory approval of megamergers may depend on antitrust implications and industry concentration.> However, the rise of banking and financial industry conglomerates brings into sharper focus a long-standing concern not addressed in existing merger guidelines. In a world dominated by mega financial institutions, governments could be reluctant to close those that become troubled for fear of systemic effects on the financial system. To the extent these institutions become "too big to fail," and where uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious. Indeed, the result may be a less stable and a less efficient financial system.> In a speech before the European Banking and Financial Forum in Prague, Mr. Hoenig discussed the challenges posed by financial industry megamergers and examined some possible policy options currently under study.Financial institutions ; Consolidation and merger of corporations ; Financial services industry