Regulators need to ‘fine-tune’ financial rules tightened after the 2008 banking crisis, but should guard against undue deregulation, said Ravi Menon, managing director of the Monetary Authority of Singapore, in an OMFIF City Lecture in Washington on 20 April.
Menon called on the US to show responsibility and leadership. ‘The US has much to gain from continuing to work alongside other regulators, exercise leadership where needed, and help to shape and promote international regulatory standards… The benefit of such give-and-take is a safer global financial system that benefits all countries.’
Priorities for the next phase were ‘to take stock of the reforms to-date – evaluate their effects, consolidate what we need to preserve, and fine-tune what we need to improve’. Additionally, international rule-makers had to ‘position regulation for the technological changes sweeping the financial industry – harness the opportunities they present while managing their risks’.
Menon recalled: ‘The global financial crisis was remorseless in the wake of destruction… The cumulative loss of output since the crisis is estimated to be 25% of one year’s world gross domestic product… The crisis revealed deep fault lines in the financial system.’ The world had reacted by strengthening banks, including through the Basel III reforms, making derivatives markets safer, and tackling the too-big-to-fail problem.’ The regulatory changes of the last eight years are substantial, especially when taken cumulatively. It is incumbent on us as regulators to be accountable for these changes, to evaluate objectively their intended outcomes as well as any unintended consequences.’
With memories of the crisis fading and the compliance burden of new regulation rising, pressures have begun to mount to unwind some of the reforms, Menon said. He pointed to concerns that liquidity has declined in some markets. Preliminary evidence indicated there is less depth and potentially less resilience under stressed market conditions, some of which might be resulting from regulation. Bank profitability had also come under pressure from a combination of slow growth, easy money, and tight regulation.
Menon cautioned: ‘We must be careful to avoid pendulum swings in regulation that could undermine the gains in financial stability that we have achieved, not to mention prolong and add to the uncertainties facing the financial industry. That regulations have imposed costs on the economy is in itself not sufficient reason to unwind them. These costs have to be weighed against the benefits of a more stable financial system to support sustainable economic growth. De-regulation has its own costs. Having said that, some fine-tuning may be necessary to reduce the unintended effects of reforms while preserving their benefits.’
Menon cited Dan Tarullo, former governor of the Federal Reserve Board, with respect to the Dodd-Frank Act and other US regulations. ‘Some recalibrations and reconsiderations will be warranted on the basis of experience.’
Menon added: ‘Adjustments to domestic regulation must not impede the globalisation of finance and the free flow of capital. Breaking up large banks or trapping capital and liquidity through ring-fencing measures may make them easier to resolve but could weaken their ability to respond to different stress scenarios. Ring-fencing could also hinder the ability of global banks to provide connectivity and facilitate intermediation across different pools of capital.’
As a small country, Singapore had an instinctive pull towards international standards and a global system, said Menon. All countries, however, must realise that ‘what happens outside our borders has an increasingly large impact on what happens inside’.
To read the full text of Menon's speech, please click here.