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

The evolution of the payments system: a U.S. perspective

In an article adapted from a speech made to at the Annual Conference of the National Bank of Austria in May of this year, Federal Reserve Bank of Kansas City President Hoenig examines recent and prospective changes in the U.S. payments system. The theme of his remarks is that the rate at which a payments system develops depends largely on a struggle between rapid technological change and natural barriers to new product acceptance. This ongoing conflict explains why Americans have seen revolutionary developments in large-dollar payments but only evolutionary developments in small-dollar and retail means of payment.> Mr. Hoenig first examines recent trends in the U.S. payments system. Second, he explores why progress has been so slow in small-dollar and retail payments by examining some of the barriers that have limited payments system progress. Third, he offers his thoughts on how the U.S. system is likely to evolve over time. Finally, he identifies the types of public policy issues the United States is likely to encounter as it moves toward a world of electronic money.Payment systems

Exploring the macro-prudential aspects of financial sector supervision

In a speech given at the Bank of International Settlements in Basil, Switzerland, in April, President Hoenig discussed how financial supervisors and monetary policymakers can contribute to a stable financial system that fully supports sustainable economic growth. ; Several financial crises in the United States over recent years have also coincided with and been influenced by a period of rapid and path-breaking changes in our financial markets. These changes in our financial structure in turn are altering the nature of the financial crises we experience. Increasingly, crises originate in capital markets and are characterized by asset-price volatility and disruptions in market liquidity. ; Mr. Hoenig reviewed the major changes evident in the U.S. financial sector and some of the supervisory steps already taken to address recent crises within the changing financial system. He also discussed the appropriate role for macro-prudential supervision and what could reasonably be accomplished under this framework, including shifting more attention to capital markets and the need to prevent costly financial crises there.Financial markets ; Financial institutions ; Financial crises