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

Global financial crisis

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

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

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

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