A REPORT

ON

EMERGING CHALLENGES IN
FINANCIAL REGULATION IN
CONTEXT OF FINANCIAL CRISIS
 

Class of 2011

Submitted to: Submitted by:

Dr. Vighneswara Swamy PM Group No.: 03

Faculty of Credit Management Akshita Lakhanpal

Department of Finance Harsimran Singh

Robin Goyal

Seemant Sharma

Date of Submission: 05th July,2010

IBS, HYDERABAD
 

1 
Table of Contents
 

Table of Contents .......................................................................................................................................... 2 

Introduction ................................................................................................................................................... 3 
Global Financial Crisis ................................................................................................................................. 4 
Underlying Causes of the Market Turmoil: .................................................................................................. 6 
Loopholes in the Regulation during Crisis Period ........................................................................................ 8 
Role of Central Banks in Policy Regulation ............................................................................................... 10 
Challenges for Emerging Economies .......................................................................................................... 13 
Indian Banking Industry ............................................................................................................................. 14 
Key Policy Rates Prevailing in Indian Economy ........................................................................................ 15 
Impact of Crisis on Indian Banking System-Analysis ................................................................................ 16 
Recommendations ....................................................................................................................................... 19 
A Vision for the Future Financial System .................................................................................................. 21 
Bibliography .............................................................................................................................................. 23 

2 
Introduction

Over the past three decades the most difficult task of the financial regulator has been to keep up
with the changing marketplace that he or she is supposed to be regulating. The speed of change
has, if anything, accelerated, with the continuous development of new trading strategies and new
“products”, linking assets, markets and currencies in new ways, and creating new risks. In this
febrile environment the regulator needs the guidance of a coherent theoretical understanding of
the propagation and management of systemic risk, as well as the pragmatic understanding of
market institutions and the concrete tools to manage the risk.
The fact that the externality associated with the risks taken by individual firms is, in many cases,
transmitted macro-economically, requires that regulation be conceived in conjunction with
macroeconomic policy. Too often today, regulation is seen as an activity that involves the
behavior and interaction of firms, with little or no macroeconomic dimension. By the very nature
of financial risk this is a serious error, and is likely to lead to serious policy mistakes. This is
particularly true in an international setting, where a major focus of systemic risk is the exchange
rate, a macroeconomic variable changes in which can lead to rapid redistributions of the values
of assets and liabilities.
Also, important steps have been taken to set rules and ensure their implementation, but financial
regulation and supervision do not take place in a vacuum. On the one hand, they must be
consistent with domestic macroeconomic policies, and they need a supportive macroeconomic
environment in which to operate. On the other hand, they have to take into account the new
international rules being proposed by multilateral agencies.
In this evolving financial environment, the international community and the Basel committee on
banking supervision of the Bank of international settlements (BIS) are currently pinning down
an appropriate regulatory framework. Developed financial systems are being challenged by the
shift in regulatory focus, and definition and implementation of appropriate regulatory standards
if facing substantial difficulties.

3 
Globaal Finan
ncial Crrisis

Liquidityy crisis, whiich impacted the wholee world ecoonomy in 20007-08, hadd its roots inn the
subprim
me lending crisis
c in US.. The Tech Bubble
B of laate 1990s, which
w burst in 2000, ledd to a
steep falll in US stock
k market andd pushed the US econom
my into recession.

The situaation of US economy annd all the ecoonomies of the

t world, which
w were anyhow
a relatted to
US econoomy, was ass shown in thhe following image:

4 
As the US debt market collapsed, flow of money and capital reduced in almost all the economies.
The situation was like the money of the whole world was going into a black hole. There was a
huge chaos in the securities market, when Lehman Brothers was declared insolvent and Merril
Lynch disappeared into Bank of America. Not only were the major financial institutions affected,
but almost all the organizations in almost every industry across the world felt the heat in some
way or the other. Thus, US economy, which has been one of the strongest economies in the
world, passed through the recession, i.e. had two consecutive quarters of negative GDP growth
rate.

5 
Underlying Causes of the Market Turmoil:

The turmoil which began to unfold during the summer of 2007 was, in part, a consequence of an
extended period of low real interest rates around the world, supported by an expansionary
monetary policy, large current account imbalances, robust global growth and limited volatility in
economic conditions. This benign environment caused investors to extend their search for yield
further out the credit quality curve, leading to overly optimistic assessments and lack of due
diligence in assessing credit risk. In response to the increased demand for credit instruments
offering higher yield, the financial system developed new structures and created new
instruments, some with embedded leverage. Many of these instruments were opaque and masked
the extent of leverage and interconnectedness of risk, which appeared to be globally dispersed
across a wide range of institutions and markets.

Much of the due diligence in examining these innovations was outsourced to credit rating
agencies. At the same time, regulated banks and financial institutions supported the acceleration
of financial innovation and the push towards more unregulated pools of capital by establishing
off-balance sheet and structured investment vehicles.

These unregulated investment vehicles, created in response to features of the regulatory and
accounting framework, often financed their operations without minimum capital buffers or
adequate liquidity plans. In addition, the risks they were exposed to, including maturity
mismatches, were often misunderstood. The trading of innovative over-the-counter financial
products, particularly those aimed at transferring credit risk, notably credit default swaps and
collateralized debt obligations, expanded very rapidly. Financial institutions failed to properly
manage and monitor risks to liquidity in the event that these markets froze. At the same time,
regulated banks and financial institutions supported the acceleration of financial innovation and
the push towards more unregulated pools of capital by establishing off-balance sheet and
structured investment vehicles. These unregulated investment vehicles, created in response to
features of the regulatory and accounting framework, often financed their operations without
minimum capital buffers or adequate liquidity plans. In addition, the risks they were exposed to,
including maturity mismatches, were often misunderstood.

6 
Risk management within institutions and the expertise of regulators did not keep pace with
these innovations. Financial sector compensation schemes based on short-term returns, without
consideration of the attendant risks, reinforced the momentum for risk taking.

Eventually the increase in asset prices could not be sustained. Delinquencies translated into price
decreases on U.S. sub-prime mortgage-backed securities, which in turn produced losses for
investors and led to margin calls for leveraged sub-prime asset holders. As the market turmoil
spread across a wide range of markets for structured and securitized products, increased risk
aversion, reduced liquidity, and concerns about the soundness of major financial institutions fed
on each other. Many institutions experienced significant balance sheet pressures, which led to a
tightening of lending standards with adverse effects on real economic growth.

In hindsight, policymakers, regulators and supervisors in some advanced countries did not act to
stem excessive risk-taking or to take into account the interconnectedness of the activities of
regulated and non-regulated institutions and markets. This was due in part to fragmented
regulatory structures and legal constraints on information sharing. Further, uncertainties
concerning exposures to, and the valuation of, structured products and the difficulty of valuing
financial instruments when markets are under stress may have exacerbated the turmoil.

7 
Loopholes in the Regulation during Crisis Period

Some of the more salient weaknesses identified as drivers of the current turmoil include:

¾ Weaknesses in Underwriting Standards: The credit quality of loans granted with the
intention of transferring them to other entities through the securitization process was not
adequately assessed.
¾ Lack of Oversight of Systemic Risks: While the build-up of leverage and the
underpricing of credit risk were recognized in advance of the turmoil, their extent was
under-appreciated and there was no coordinated approach to assess the implications of
these systemic risks and policy options to address them. There was also insufficient
recognition of the interconnectedness of risks within both regulated and unregulated
markets.
¾ Lack of Oversight of Unregulated Pools of Capital: Unregulated and lightly regulated
pools of capital, such as hedge funds, private equity funds, and a number of the banks’
off-balance sheet securitization vehicles, grew rapidly in importance during the period
preceding the crisis. Regulatory arbitrage pushed risks outside the regulatory framework
and, in many jurisdictions, oversight of these markets and entities consisted to a large
extent of indirect oversight through the supervision of counterparties and market
discipline.
¾ Weak performance by Credit Rating Agencies: There was an over-reliance on credit
rating agencies and shortcomings in rating models and methodologies, as well as
insufficient attention to conflicts of interest in the rating process.
¾ Pro-cyclical Tendencies Fed by Regulatory and Accounting Frameworks: Certain
aspects of accounting frameworks and capital regulation tend to enhance the natural
tendency of the financial system to amplify business cycles, affecting both the degree of
credit expansion in benign conditions and the degree of credit contraction in the
downturn.

8 
 ¾ Shortcomings in Risk Management Practices: A number of the standard risk
management tools used by financial firms relied on samples of historical data from short
periods and were not suited to estimating the likelihood and the scale of potential losses
in the adverse tail of risk distributions for structured credit products. In addition,
compensation arrangements often created incentives for excessive risk-taking through
insufficient regard to longer-term risks.

¾ Financial Innovation Outpacing Risk Management: There was a significant

acceleration of financial innovation in years leading up to the crisis that far outpaced the
ability of firms to manage risks and of regulators to effectively monitor them.

¾ Weaknesses in Disclosure: Weaknesses in public disclosures by financial institutions

damaged market confidence during the turmoil. Public disclosures by financial
institutions did not always make clear the type and magnitude of risks associated with
their on- and off-balance sheet exposures.

¾ Weaknesses in Resolution Procedures: Existing procedures for resolving troubled

institutions have been shown to be inadequate when an institution imposes substantial
systemic risks. In addition, national resolution mechanisms have not been effective in
some cross-border resolutions.

¾ Lack of Transparency in Various OTC Markets: In many cases, investors and other
market observers could obtain only minimal information about pricing, trading volume,
and aggregate open interest in various products that trade in the OTC markets.

9 
Role of central Banks in Policy Regulation
 

Central banks have been at the heart of the global financial crisis. They have been blamed
for policies and actions that got the world into the crisis; they have been praised for leading
the world out of it. Both are fair assessments. Central banks have been a part of the
problem and a part of the solution.

Monetary Policy in a Globalizing Environment

The crisis has demonstrated the difficulties of macroeconomic management in a globalizing
world. Even as governments and central banks acted with an unusual show of policy force, they
were unable to get the situation under control because of the interconnectedness of the financial
system and the effects, positive and negative, of external developments on domestic policy
actions. Most important, they found that sentiment and confidence were remarkably correlated
across countries. External developments interact with the domestic economy in complex,
uncertain, and even capricious ways. Central banks have to deepen their understanding of these
interactions. Some of the channels through which cross-border transmission occurs are quite
familiar—global prices, including commodity price movements; synchronization of business
cycles; capital flows; strong co-movement of asset prices; exchange rates of key international
currencies; and interest rate policies of major central banks. Some of the transmission channels
are less familiar. For example, the crisis has shown that even differences in regulatory regimes
can trigger arbitrage-based action and dilute the efficiency of domestic policies.
Take managing capital flows. Emerging market economies experienced a sudden stop in capital
inflows during the crisis as well as capital outflows—the result of global deleveraging. Now the
situation has reversed and many emerging market economies again have net inflows. Managing
these flows, especially if they are volatile, will test the effectiveness of central bank policies in
semi-open emerging market economies. A country whose central bank does not intervene in the
foreign exchange market will incur the cost of currency appreciation unrelated to fundamentals.
If central banks intervene to prevent appreciation, they will have to contend with additional
liquidity and potential inflation pressures. If they sterilize (soak up) the resulting liquidity, they
run the risk of driving up interest rates, which would hurt growth prospects. Volatility in capital
 

10 
flows could also impair financial stability. How emerging market economies manage the
impossible trinity of an open capital account, a fixed exchange rate, and an independent
monetary policy will affect their prospects for growth and price and financial stability.

Central Banks and Financial Stability

While there is broad agreement that financial stability is neither automatic nor inevitable, there is
less agreement on whether it should be explicitly included in the mandate of central banks. One
argument is that explicit inclusion would be redundant, because financial stability is a
necessary—although not sufficient—condition for achieving the conventional central bank
objectives relating to inflation, output, and employment. On the other hand, there is a growing
view that unless financial stability is explicitly included in the mandate of central banks, it is
likely to fall through the cracks .Complicating matters, defining financial stability in a precise,
comprehensive, and measurable manner is proving to be difficult. Nevertheless, we now know
that there are two attributes of financial instability:-
• Excessive volatility of macro variables such as interest rates and exchange rates that have a
direct impact on the real economy; and
• Financial institutions and markets threatened by illiquidity to the extent of jeopardizing
systemic stability.
Do central banks have the instruments to address the mandate of financial stability? One clear
instrument for preserving financial stability is the lender-of-last-resort function. During the
crisis, central banks pumped in enormous amounts of liquidity to unfreeze the system through
the lender-of-last resort window. While this made individual institutions liquid, the market
remained illiquid, thereby revealing the limitation of the window instrument in combating
illiquidity. A central bank can infuse liquidity, but it’s hard to ensure that the available cheap and
abundant money is used to purchase assets whose value is rapidly eroding. The only option may
be for the central bank to buy the assets. This means that the central bank must be not only the
lender but also the market maker of last resort. These issues have yet to be clearly defined, let
alone resolved. But they must be resolved soon.

11 
Managing the Costs and Benefits of Regulation
To safeguard financial stability, the Reserve Bank of India used a variety of prudential
measures, including specification of exposure norms and pre-emptive tightening of the risk
weights attached to assets and the requirements for loss provisioning. But these measures often
carry a cost. For instance, tightening risk weights arguably tempers the flow of credit to certain
sectors, but excessive, premature, or unnecessary tightening can blunt growth. Similarly,
exposure norms offer protection against concentration risks; however, such limits can restrict the
availability of credit for important growth sectors. Thus, as in the case of price stability, central
banks face the challenge of managing the trade-off between financial stability and growth.
After a crisis, with the benefit of hindsight, all conservative policies appear safe. But excessive
conservatism can thwart growth and stifle innovation. The question is, what price are we willing
to pay, or—conversely—what potential benefits are we willing to give up, to cope with the
unexpected, a black swan event? Experience shows that balancing the costs and benefits of
regulation is more a question of good judgment than analytical skill. Central banks, especially
those of developing countries, such as India, need to hone their judgment skills as they pursue
growth and financial stability.

12 
Challlenges fo
or Emerrging Economiies

The globbal nature off this crisis has

h made it clear that while
w financiially integratted markets have
benefits, they also have
h risks – with signifi
ficant conseqquences for the real ecoonomy. Globbally,
there is a need for fin
nancial sectoor reform.
Globally, there is a need
n for a wider
w regulatoory perimeteer and greateer cooperatioon. For advaanced
countriess, this crisis has had a seevere impactt on the real economy ass well as thee financial seector,
and has led to exten
nsive governnment intervvention. Emeerging markkets must alsso cope witth the
added buurden of sig
gnificant shoort- and meddium term challenges, inncluding in developing their
financial systems. The
T main lessson to emeerge is that prevention is better th
han cure. While
W
interventtions have beeen effectivee at maintainning short teerm stabilityy, policy-makkers must reemain
vigilant towards
t the need to ballance regulaation with thhe role of seelf-governingg markets annd to
establish a sustainablle and effecttive financial architecturre.

13 
Indian Banking Industry

The last decade has seen many positive developments in the Indian banking sector. The policy
makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial sector regulatory entities, have made several notable efforts to improve
regulation in the sector. The sector now compares favorably with banking sectors in the region
on metrics like growth, profitability and non-performing assets (NPAs). A few banks have
established an outstanding track record of innovation, growth and value creation. This is
reflected in their market valuation. However, improved regulations, innovation, growth and
value creation in the sector remain limited to a small part of it.
The cost of banking intermediation in India is higher and bank penetration is far lower than
in other markets. India’s banking industry must strengthen itself significantly if it has to support
the modern and vibrant economy which India aspires to be. While the onus for this change lies
mainly with bank managements, an enabling policy and regulatory framework will also be
critical to their success. The failure to respond to changing market realities has stunted the
development of the financial sector in many developing countries. A weak banking structure has
been unable to fuel continued growth, which has harmed the long-term health of their economies.
Indian banks have compared favorably on growth, asset quality and profitability with other regional
banks over the last few years.
The banking index has grown at a compounded annual rate of over 51 per cent since April
2001 as compared to a 27 per cent growth in the market index for the same period. Policy
makers have made some notable changes in policy and regulation to help strengthen the sector.
These changes include strengthening prudential norms, enhancing the payments system and
integrating regulations between commercial and co-operative banks.

14 
Key P
Policy Rates Prrevailingg in Ind
dian Ecoonomy

15 
Impact of Crisis on Indian Banking System - Analysis

A spell of severe credit crunch, salary cuts, rehiring and a lot of news on loans going bad lead
this paper to test the hypothesis that the Indian Banking Industry has been performing badly in
contemporary times and was adversely impacted due to the continuing Global Financial Crisis.
The methodology adapted to analyze the performance of all the Scheduled Commercial Banks of
the Indian Banking Industry was to study the trend of the two most significant parameters/ratios
applicable for Banking Industry. Among the parameters of performance, the most significant
ones comprise Net Non Performing Assets as a percentage of Net Advances & Capital
Adequacy Ratio. A single composite weighted average of all nationalized banks, Private sector
banks and foreign banks in India has been considered to view the trend in the period 2005-06 to
2007-08. The analysis shows that the Indian Banking Industry is stable and still growing albeit at
a slow pace

1. Analyzing the Capital Adequacy Ratio (CAR) of the Indian Banking Industry.

It is measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit

exposures. It is also known as "Capital to Risk Weighted Assets Ratio (CRAR)."

Capital Adequacy Ratio – CAR:

This ratio is used to protect depositors and promote the stability and efficiency of financial
systems around the world.

TierOneCapital + TierTwoCapital
CAR =
RiskWeightedAssets

Two types of capital are measured: tier one capital, which can absorb losses without a bank
being required to cease trading, and tier two capital, which can absorb losses in the event of a
winding-up and so provides a lesser degree of protection to depositors.

16 
Table 1: Analysis off Capital Adeequacy Ratioo for the perriod year 20006 to 08

[Link]. Category
y of Indian Ba
anks Capital Adequacy
y Ratio

(No of Ba
anks in '06,'07
7,'08)
(Ass on March 31, In Per cent)

2005-06 2006-07 2007-08

I Nationalise
ed Banks (28,28,28) 12.2 12.27 12.05

II Private Secttor Banks (27

7,25,23) 11.71 12.98 15.37

III Foreign Banks in India (29

9,29,28) 41.84 39.25 44.1

Weighted
W Av
verage of I, II and III 22.27 22.03 24.38

      Calculated Trend Vs Actual off Capital Adeequacy Ratio
o of Indian B
Banks 

17 
 2. Analyzing the Non Performing Assets (NPA) of the Indian Banking Industry.

The fast rising NPA of Banking Industry is root cause of the Sub-prime crisis. This has now
grown into a Financial Crisis which is fast engulfing other countries. It is significant to analyze
the trend of Net NPA as a % to Net Advances.

Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims
received and held pending adjustment + Part payment received and kept in suspense account
+Total provisions held)

Analysis of Net NPA as % to Net Advances. Years 2006 -08

[Link]. Category of Indian Banks Net NPA as % to Net Advances

(No of Banks in '06,'07,'08)
(As on March 31, In Per cent)

2005-06 2006-07 2007-08

I Nationalised Banks (28,28,28) 1.27 0.93 0.77

II Private Sector Banks (26,24,23) 1.91 1.47 0.84

III Foreign Banks in India (29,29,28) 4.2 0.76 0.76

Weighted Average of I, II and III 2.49 1.03 0.79

The banking system in India remained largely unaffected by the financial crisis, while several
banks and financial institutions in the advanced countries failed or had to be bailed out with large
sovereign support.
The financial soundness indicators for the banking system in India during 2008-09 showed
stability and strength; every bank in the system remained above the minimum regulatory capital
requirement. Stress test findings suggested the resilience of the financial system, in the face of
the severe external contagion from the global financial crisis. As at end-March 2009, all Indian
scheduled commercial banks had migrated to the simpler approaches available under the Basel II
framework. Post-crisis changes that may be necessary to strengthen the regulatory and
supervisory architecture would be based on the evolving international consensus as well as
careful examination of their relevance to the India-specific context. The time schedule for
implementation of advanced approaches under Basel II has been notified and an inter-
disciplinary Financial Stability Unit has been set up to monitor and address systemic
vulnerabilities
The Reserve Bank continued to build a regulatory and supervisory architecture in line with
the international best standards, adapted to suit the domestic conditions. The objective has been
to make the Indian banking sector more competitive, efficient, sound and dynamic.
 

18 
Recommendations

The Recommendations contained in this Report are a response to the causes of the current crisis,
and are intended to prevent future ones from occurring. They are consistent with the recognition
that robust regulation in each country, based on effective global standards, is vital to future
financial stability.

History shows that, while each financial crisis is different, a shared feature is that they are
preceded by a period of excess risk-taking, strong credit growth and asset price increases in
various markets. The current crisis highlights the extraordinary financial and social costs of
failures in the financial system.

These recommendations given in this report support the vital role of the financial system in
promoting economic growth while, at the same time, reducing the likelihood of a similar crisis in
the future and mitigating the consequences of future periods of financial stress.

1. As a supplement to sound micro-prudential and market integrity regulation, national financial

regulatory frameworks should be reinforced with a macro-prudential overlay that promotes a
system-wide approach to financial regulation and oversight and mitigates the build-up of excess
risks across the system. In most jurisdictions, this will require improved coordination
mechanisms between various financial authorities, mandates for all financial authorities to take
account of financial system stability, and effective tools to address systemic risks. It will also
require an effective global table to bring together national financial authorities to jointly assess
systemic risks across the global financial system and coordinate policy responses.

2. The scope of regulation and oversight should be expanded to include all systemically
important institutions, markets and instruments. This will require enhanced information for
financial authorities on all material financial institutions and markets, including private pools of
capital. Large complex financial institutions require particularly robust oversight given their size
and global reach. The regulatory and oversight framework should strive to treat similar

19 
institutions and activities consistently, with greater emphasis on functions and activities and less
emphasis on legal status.

3. Once conditions in the financial system have recovered, international standards for capital and
liquidity buffers should be enhanced, and the build-up of capital buffers and provisions in good
times should be encouraged so that capital can absorb losses and be drawn down in difficult
times

4. Through the expanded Financial Stability Forum, the International Monetary Fund and the
international standard setters, international standards, including those for macro-prudential
regulation, the scope of regulation, capital adequacy and liquidity buffers, should be coordinated
to ensure a common and coherent international framework, which national financial authorities
should apply in their countries consistent with national circumstances. The financial regulatory
and oversight frameworks and their implementation in all G-20 countries should be reviewed
periodically, validated internationally and made public.

5. Sound micro-prudential and market-conduct regulation supplemented with an effective macro-

prudential framework requires enhancements to a range of supporting policies and infrastructure,
including: compensation practices that promote prudent risk taking in line with principles
developed by the FSF; the greater standardization of derivatives contracts and the use of risk-
proofed central counterparties; improved accounting standards that better recognize loan-loss
provisions and dampen adverse dynamics associated with fair-value accounting; effective
enforcement of regulation that is coordinated internationally including the enforcement of the
adherence of credit rating agencies to the substance of the IOSCO code of conduct; and national
authorities and international standard setters working together and assisting each other in
strengthening financial regulatory and oversight frameworks and their implementation across the
G-20 and beyond.

20 
A Vision for the Future Financial System

The financial system will continue to play a vital role to intermediate savings and provide
funding to the real sector, thereby supporting economic growth. The report recognizes that
financial markets will remain global and interconnected, while financial innovation will continue
to play an important role to foster economic efficiency. Protectionist moves must be strongly
resisted. In order to address the underlying causes and weaknesses identified above, the report
envisages the need for a reform of the regulatory framework to avoid the emergence of similar
crises and to mitigate the consequence of any future episode of financial stress.

The regulatory framework will need to keep pace with the associated risks in a more rapid and
effective manner. Large complex financial institutions will continue to operate in multiple
jurisdictions in order to meet the needs of their large global clients, and supervision will need to
be better coordinated internationally with a robust global resolution framework. In order to avoid
regulatory arbitrage, there is a need for greater consistency in the regulation of similar
instruments and of institutions performing similar activities, both within and across borders.

In addition, capital markets will require greater emphasis on reducing counterparty risk and on
ensuring that their infrastructure allows them to remain a source of funding during periods of
stress.

The post-crisis period will likely be characterized by a financial system with lower levels of
leverage, reduced funding mismatches (both in terms of maturity and currency), less exposure
to counterparty risk, and greater transparency regarding financial instruments. After credit
markets recover from the crisis, it will be important to mitigate the inevitable pressure to expand
profits through increased risk-taking. A more developed macro-prudential approach will be an
important element in this context.

21 
The type, size, and cross-border exposures of institutions and markets that will emerge from this
crisis will likely be considerably different than before. As banks and financial institutions
consolidate, policy makers will have to adapt prudential regulation to varying degrees of size and
concentration. Similarly, competition policy will play an important role in ensuring healthy
competition.

Financial institutions, markets and instruments will therefore continue to evolve in ways
which pose challenges for regulation, notwithstanding the retrenchment that is currently
underway. Financial institutions, policymakers, supervisors and regulators will all need to
become better equipped to manage the interconnectedness of markets, both domestically
and globally, the effects of innovation, and the potential for incentives to become
misaligned.

22 
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  Thank You 

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