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Financial Market Reform

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Practice Advice in Financial Sector and Pension Policy

Financial Market Reform (OECD)

Description:  Well-functioning financial sectors reduce the cost of producing and trading goods and services and limit the risks of instability.

Commentary:  The recent financial crisis and its consequences on economic growth and employment have demonstrated the importance of prudential regulation of financial sectors, while preserving the well-established benefits from financial market competition. In recognition of the need for internationally coordinated rules for financial stability, OECD countries are participating in G20 level talks concerning the reduction of risky financial arbitrage. The result of such talks is the Basel III Agreement, which increase the size of capital reserves banks must hold against loses over the period 2011- 2018.  Broad consensus has been also achieved on a number of principles:

  • Designing a macro-prudential policy to mitigate systemic risks and alleviate the accumulation of credit-driven asset price bubbles.
  • Reducing the moral hazard posed by systematically-important “too big to fail” institutions and the associated economic damage. Among the options to discuss the “too big to fail” problem are improved supervisory approaches, simplification of firm structures, targeted capital, leverage and liquidity requirements, simplification of firm structures, strengthening national and cross-border resolution frameworks, the development of “living wills” for major cross-border firms and changes to financial infrastructure to reduce contagion risks.
  • Implementing compensation practices at large financial institutions to ensure that compensation schemes do not encourage excessive risk taking.
  • Introducing cross-border crisis management mechanisms by ensuring that, firstly, national authorities have an effective toolkit for bank resolution, harmonized as far as possible. Secondly, by ensuring that all cross border institutions have systematic functioning stability groups, supported by regularly updated “living wills” in which institutions outline preferences in case of bankruptcy. Thirdly, by signing burden-sharing agreements established through nations laws to limit ring fencing ( the financial separation of a company’s assets or profits without necessarily separating operations).

 The OECD further recommends that governments seek to strengthen accounting standards, and consult with International and US Accounting Standards Boards to improve and simplify accounting for financial instruments, provisioning and impairment recognition. Creating common technical standards and ensuring efficient and harmonized cross-border supervision should help create an integrated crisis management framework.

Source: OECD (2011), "Economic Policy Reforms," OECD, Going for Growth 2011 Report at: http://www.oecd-ilibrary.org/docserver/download/1211031ec003.pdf?expires=1355427163&id=id&accname=ocid177151&checksum=BF4E625E7965F8652B460518CB822611 (accessed 3 January 2013).

Page Created By: Khilola B. Zakhidova on 3 January 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

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