During the last decade, the global economy has experienced strong growth and remarkable increase of financial flows. The international sector has been characterized by the increased complexity of products traded and the market development that transfer risks between entities in order to bring more and more, the products to the specific needs financing or investment agents.

The steady improvement in financial knowledge and technological advances enabled the creation of more complex products in search of higher returns, it probably will produce a parallel advance in the techniques of management and risk assessment undertaken. For its part, the regulatory and supervisory authorities failed to detect weaknesses early enough that they were creating. Among them, the excessive leverage of banks’ balance sheets, which for years growing at rates that were incompatible with a proper risk management, and insufficient capital from banks to cover the risks they were taking.

The turmoil in financial markets that emerged in July 2007 triggered a severe crisis in the international financial system and highlighted the weaknesses in it. Among them, the problems properly assess certain financial products-especially the most complex, “the deficiencies in credit ratings issued by rating agencies, poor management of risks, including liquidity by some entities, the lack of market transparency and harmony in these markets regulated and unregulated entities.

We are therefore experiencing an unprecedented crisis, which began as financial and economic has become. Both are being fed back, which is hampering its separation. International financial crisis has generated a sharp fall in asset prices, which has directly affected the balance sheets of banks. In this way, have generated very significant accounting losses, in some cases, have not been covered with the available capital by institutions. Therefore, credit institutions have been confronted with the need to increase their capital to survive in fresh capital to capture moments where it is very difficult.

One of the many negative consequences that are having this crisis is that, because of the excesses committed, obscures the viewer’s eyes to the advantages and positive aspects involved. On the other hand, financial innovation is genuine contribution to the efficient functioning of markets and, second, globalization. The measures taken should, therefore, achieve a difficult balance. Also, be careful that the solutions to the problems arising from the crisis do not lead to national protectionist policies in the financial field, but coordinated international solutions prevail.

Clearly, international financial regulation is a prerequisite for achieving sustainable economic growth. Therefore, the authorities around the world, including central banks, are using all measures within its power to overcome critical situations on the bench and try to restore confidence in the financial system. In addition, various international committees are considering fundamental changes in the future international regulation.

Regarding the former, the measures being taken with greater urgency to recapitalize and ensure the banks’ assets and to cleanse bank balance sheets called toxic assets are being designed to restore confidence in the system and for credit markets returned to normal. It is necessary to stabilize these markets for institutions to fulfill their role of channeling savings into investment and that, in this way, families and businesses access to finance.

Regarding the latter, the proposals on future international financial regulation, and the unprecedented measures taken to restore financial stability should be accompanied by strong reforms that can address the weaknesses that the crisis has highlighted and prevent it repeated in the future.

In order to find comprehensive solutions, various international groups and committees have made proposals for future very adequate. Hay be mentioned, especially the Group of 20 (G-20), comprising the most developed countries and emerging countries, and has been invited to Spain.

The G-20 leaders pledged to cooperate and implement the necessary reforms to improve the operation and solvency of financial systems worldwide. Specific targets were set for improvements in transparency and valuation of financial assets and the regulation of financial institutions, among others, and adopted an action plan with specific recommendations. It is clear that the current regulatory initiative in the financial system is in the proposals that emerge in the mountains.

The G-20 set a series of immediate measures to restore order as quickly as possible confidence in institutions, improving valuation standards, increasing demands for transparency and information to the market, demanding a strengthening of management risks and requiring national authorities to ensure that financial institutions have the capital necessary to maintain confidence. Initiatives have been taken to restore confidence in markets with measures such as regulation of rating agencies.

These agencies play an important role in financial markets, since their ratings are used by investors, lenders, issuers and governments for making investment decisions and financing. In addition, regulated entities such as banks, investment service companies or insurance companies, among others, may use these ratings as a benchmark for calculating their capital requirements for solvency.

Consequently, the rating has a significant impact on investor confidence and need to be independent, objective and of the highest quality. However, one of the shortcomings highlighted by the crisis has been that these agencies have failed to reflect early enough in their ratings the worsening market conditions. Therefore, the statement of G-20 included the international financial regulation and the European Union is currently drafting a regulation governing the registration, activity and the monitoring of these agencies.

The G-20 establishes the need to review what should be the scope of regulation with particular emphasis on institutions, instruments and markets that are not currently regulated by setting the objective that all systemically important institutions are adequately regulated.

As regulatory initiatives with regard to credit institutions included the work of the Committee of Banking Supervisors of Basel. The committee proposed to increase capital requirements for certain products, measures to promote more rigorous supervision and management on issues such as the concentration of risks, off-balance sheet exposures or securitization. It also proposes improvements in the valuation of complex instruments and the management of liquidity risk. Finally, include improvements to the information that institutions should provide the market.

The committee also is working on various initiatives in the medium term and, therefore, aimed at putting more credit institutions in a better position to face the next crisis to be faced and, in general, to make them more resistant to economic cycles. These initiatives can only take place when the crisis is over we are experiencing. In particular, we are looking to the solvency rules adequately capture all the risks taken by institutions, their regulatory capital is higher quality, with special emphasis on capital and reserves, and, finally, that the entities constituting capital cushions, liquidity and supplies to equip themselves in times of high economic cycle, which normally is when the balance sheets of the fastest growing entities, and are released during low cycle times, which is when risks materialize.

The crisis has revealed deficiencies in the financial system and the need for globally coordinated action to resolve them. Some of these measures represent a transformation from the previous situation, as is the inclusion of new institutions, markets or products within the scope of regulation or supervision consist prudencial. Deepen reforms already started before the crisis, subjects such as strengthening risk management, corporate governance or disclosure of information to the market, to name a few, were already covered by the agreement of the Basel II capital and had been transposed to many national laws.

These regulatory changes should be accompanied by a strengthening of national monitoring and improved global coordination. All this, with the objective that the financial system to fulfill its function of channeling savings into investment and not again become a factor that amplifies the imbalance.

Incoming search terms:

Tagged with: • • • • •

Filed under: finance

Like this post? Subscribe to my RSS feed and get loads more!