Financial Sector
El Erian on the challenges for the Financial Sector.
Let us start with a few unambiguous realties that, nevertheless, sometimes veer quickly into controversy.
I suspect that virtually everyone would agree that, in the last few years, we have seen an unprecedented focus on regulatory reform, and rightly so. Indeed, the issue has not been the input but, rather, the output.
Since the financial crisis, lawmakers in several countries have passed on paper seemingly sweeping financial reform, and regulators have been working hard to implement the details at a breakneck pace. Examples of national, regional and multilateral initiatives include (and are certainly not limited to):
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The Dodd-Frank Act in the United States that, among other things, involves the overhaul of the derivatives landscape, increases transparency and disclosure, implements the “Volcker Rule” that limits trading activities within banks and establishes measures meant to address both “too big to fail” and systemically important institutions;
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The European Market Infrastructure Regulation (“EMIR”), which, similar to Dodd-Frank, addresses derivatives trading, central clearing, fund structure and reporting and disclosure requirements in Europe;
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Markets in Financial Instruments Directive (“MiFID”) II, which, in updating the original directive, addresses issues of high frequency trading, transparency and position limits in Europe; and
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Basel III regulations on capital requirements and other aspects to be phased in between 2013 and 2019.
In both motivation and design, these reforms seek to address many of the sources of instability that played a role in the global financial crisis. For example, they aim to ensure:
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Stronger regulation and more robust financial institutions, including increased capital cushions, which (in level and quality) are rightly seen by the vast majority of people as critical to the safety and soundness of institutions and the system as a whole;
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Plugging regulatory gaps to improve appropriate oversight over key players and products, including those that previously migrated to the shadow banking system;
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Derivatives reform, including central clearing, where the goal is to reduce counterparty risk, increase transparency, improve price discovery and provide regulators with a better handle on information that speaks to the financial health of the system/key players. Also better margin requirements on non-centrally cleared derivatives;
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Increased transparency over market transactions, including electronic trading platforms/increased real-time price information and transparency, which shine a better spotlight on the once bespoke, opaque, bilateral swaps markets;
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Increased protection for consumers and retail investors in their interactions in financial markets; and
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Addressing “too big to fail” by requiring the relevant banking firms to hold additional capital cushions and adopt “living wills” that outline how they would wind down in the event of a default.Full article here.