Reform of Financial Supervisory and Regulatory Regimes: What has Been Achieved and What is Still Missing

Weak financial supervision was partly responsible for the Global Financial Crisis (GFC) of 2007--2009. The liquidity risk in the special purpose subsidiaries was not well recognized in regulation; there were large financial institutions that escaped rigorous supervision; and the concept of ‘too-big-to-fail’ caused moral hazard in management. This paper examines whether these shortcomings were adequately addressed in the post-crisis reform of the global financial architecture. The United States overhauled the supervision framework, which includes shifting supervision authorities of systemically important financial institutions (SIFIs) to the Federal Reserve and increasing capital requirement on those SIFIs. Similar reforms of supervision frameworks have been implemented in European countries. The Bank of International Settlements (BIS) also proposed Basle III, significantly increasing capital requirements, and modifying risk weights. Despite all these efforts, one key component on the reform agenda is not adequately addressed, namely the procedure to have an orderly resolution mechanism for a large financial institution. Without the procedure, the too-big-to-fail problem will continue to cast a shadow over the global financial architecture.