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The current ongoing financial crisis is attributed to a variety of factors such as the developments in the sub-prime mortgage sector, excessive leverage, lax financial regulation and supervision, and global macroeconomic imbalances. At a fundamental level, however, the crisis also reflects the effects of a long period of excessively loose monetary policy in the major advanced economies during the early part of this decade.
The theory and belief of efficient and rational markets have been severely discredited by the current crisis. There is, therefore, a growing agreement for much strengthened, and perhaps, intrusive regulation and supervision in the financial sector. Hitherto unregulated institutions, markets and instruments will now have to be brought under the regulatory framework. A more developed macro-prudential approach will be important. Once the current financial crisis is beyond us, minimum regulatory capital requirements would need to be significantly above existing Basel rules, with emphasis on Tier I capital, and supported by a maximum gross leverage ratio. Liquidity regulation and supervision must be recognised as of equal importance to capital regulation, reinforced by an effective global liquidity framework for managing liquidity in large, cross-border financial institutions. The issue of remuneration in the financial sector would require reforms on an industry-wide basis so that improved risk management and compensation practices by some systemically important firms are not undermined by the unsound practices of others. Whereas the suggested reform principles are being increasingly well accepted, many challenges will arise on their modes of implementation, and their practicality. From the point of view of Emerging Market Economies (EMEs), the volatility in capital flows â€“ mainly the outcome of extant monetary policy regimes in developed countries - has led to severe problems in both macro management and financial regulation. This will remain a challenge since there is little international discussion on this issue.
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Dr. Rakesh Mohan, Professor in the Practice of International Economics and Finance, and Senior Fellow, Jackson Institute of Global Affairs, Yale University
- Tuesday, 27 July 2010
- 12.15 p.m. - 1.30 p.m.
Seminar Room 3-1
Level 3, Manasseh Meyer
Lee Kuan Yew School of Public Policy
469C Bukit Timah Road