PM – financial system needs to be regulated through five core principles
The Prime Minister, Gordon Brown, has recently explained why there is such a dire need to look at how the financial industry is regulated in the UK, and to address the issue of stricter regulation not just in Britain but also in other countries so that the needs of the future can be met.
He said that the fact that the banking industries around the world were linked meant that if there was a bad bank in one country a lot of good banks on other countries could be adversely affected.
Gordon Brown said: “The new challenge is that with global financial flows so large and so interlinked, we live in a world where a bad bank anywhere is a threat to good banks everywhere; where financial products have become so complex that the senior management of banks often did not understand the risks they were taking on; and where selling assets around the globe did not diversify risk but instead spread contagion. I have learned from this financial crisis that the disciplines we expect of markets cannot be guaranteed without strengthened supervision. This government and governments everywhere have to respond to the huge wave of global financial flows that spawned new trillion dollar markets outside the regulatory net.”
He reiterated that the financial and regulatory system had to be imrpoved both in Britain and on an internation basis, and he outlined five core principles that he thought would mark a good starting poimt.
The PM stated: “Faced with these new realities, we must reshape our financial and regulatory system internationally and at home. The starting point must be the five core principles I set out last October – transparency, accountability, responsible risk-taking, prudential regulation and international co-operation.”
Mr Brown also accepted that since the Labour government had come into power in 1997 things had changed and needs had altered: “While the 1997 supervisory system was right for the circumstances we faced then, it is now clear that the detailed regulation of financial markets across the world did not keep up with the pace of change in the global economy.”
Mr Brown also gave a definition of his five core principles, as outlined below:
“First, transparency means bringing the so-called ’shadow banking system’ into the regulatory system, not operating parallel to it. And across the world, financial institutions need to be supervised not on what name they give themselves – be it banks, hedge funds or investment funds – but on what they do. We also need to ensure that all jurisdictions – such as offshore havens – and all important markets are covered by global supervision.
Second accountability means boardroom integrity, where boards of directors must understand and be held responsible for the risks they undertake. And credit rating agencies need to be free of conflicts of interest and be properly licensed.
Third, responsible risk taking means an end to the excesses from short-termism, instead rewarding people for long term success not short term deals. But to be most effective it has to be done internationally. A race to the bottom is in no ones interest. So we should agree a new international approach to pay and bonus structures.
The fourth principle of prudential regulation means taking into account the effect of a bank’s capital, liquidity, solvency and conduct on the whole financial system.”
Tags: financial system, bank industry, need, bank, factFinally, he stated: “Lastly, international co-operation lies at the heart of all our changes – recognising that financial institutions that work across borders need to be under cross border supervision too and regulators in one country must co-operate far more closely with regulators in other countries to create a global network of regulation that captures the risks to us all.”
