The Fundamental Principles of Financial Regulation

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Geneva11_latest.qxp 07/05/2009 16:48 Page i

Geneva Reports on the World Economy 11 Geneva11_latest.qxp 07/05/2009 16:48 Page ii

International Center for Monetary and Banking Studies (ICMB)

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The Fundamental Principles of Financial Regulation

Geneva Reports on the World Economy 11

Markus Brunnermeier Princeton University and CEPR

Andrew Crocket JPMorgan Chase

Charles Goodhart London School of Economics

Avinash D. Persaud Chairman. Intelligence Capital Limited

Hyun Shin Princeton University and CEPR

ICMB INTERNATIONAL CENTER FOR MONETARY AND BANKING STUDIES

CIMB CENTRE INTERNATIONAL D’ETUDES MONETAIRES ET BANCAIRES Geneva11_latest.qxp 07/05/2009 16:48 Page iv

International Center for Monetary and Banking Studies (ICMB)

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About the Authors

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v Geneva11_latest.qxp 07/05/2009 16:48 Page vi

vi The Fundamental Principles of Financial Regulation

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Contents

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viii The Fundamental Principles of Financial Regulation

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Acknowledgements

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ix Geneva11_latest.qxp 07/05/2009 16:48 Page x Geneva11_latest.qxp 07/05/2009 16:48 Page xi

Foreword

Qebª^rqelopªlcªqefpª Dbkbs^ Obmloq lk qeb Tloia B`lkljv ôbªmobaljfk^kqivªj^òl ^kaªcfk^k`bªb`lkljfpqp+ªFkªlroªsfbtªprèªb`lkljf`ª^kîvpfpª^kaªfkpfdeqªe^p)ªfk qebªm^pq)ª_bbkªfkprccf`fbkqivª^mmifbaªqlªqebªabpfdkªlcªcfk^k`fîªobdri^qflk+ªQebªmro* mlpbªlcªqefpªm^mboªfpªqlªebimªob`qfcvªqe^qªi^`rk^+ Qebªòfpfpªtefèª_bd^kªfkªqebªRPªpr_*mofjbªjloqd^dbªjôhbqªfkªbôivª/--4ª^ka qebkªpmobâª_olâivª^kaªabbmivªt^pªklqªqebªcfopqª_^khfkdªòfpfp+ªFqªt^pªìlpboªqlªqeb .--qe+ªTbª`^kªao^tª^ªcbtªfjmloq^kqªfjmif`^qflkpªcoljªqefpªl_pbo s^qflk+ªFcª^k bsbkqªtfqeªtfabpmobâª^kaªpbsbobªb`lkljf`ª^kaªpl`fîª`lkpbnrbk`bpªhbbmpªlk obmb^qfkdªfqpbic)ªqebªlkrpªfpªprobivªlkªqebª^rqelofqfbpªqlªè^kdbªpljbqefkd+ @efafkdª_^khbopªfpªp^qfpcvfkd8ª_rqªfkprccf`fbkq+ªTebkª^ªobdri^qlovªjbè^kfpjªe^p c^fibaªqlªjfqfd^qbª_llj,_rpqª`vìbp)ªpfjmivªobfkclo `fkdªfqpª_^pf`ªpqor`qrobªfpªklq ifhbivªqlª_bª^ªpr``bppcriªpqo^qbdv +ªJloblsbo)ª^ªqvmbªlcªòfpfpªqe^qªobmb^qpªfqpbicª`^k * klqªb^pfivª_bªmrqªaltkªqlªkbt )ª`ljmibu)ªfkpqorjbkqp+ªFkªqefpªobmloq)ªtbªpbqªlro pfdeqpªlkªjlabo^qfkdªqebªob`roofkdª`vìbªlcªcfk^k`fîªòfpbp)ª`vìbpªqe^qªfkªlroªsfbt ôbªklqªtbaabaªqlªmôqf`riôªfkpqorjbkqp)ªfkpqfqrqflkp)ªfkafsfarîpªloªfkcloj^qflk+ª Qebªmobsbkqflkªlcªòfpbpªfkªqebª_^khfkdªpvpqbjªfpªjlobªfjmloq^kqªqe^kªfkªqeb `^pbªlcªlqeboªfkarpqofbp+ª>pªlrqifkbaªfkª@e^mqboª.)ªqebªbuqbokîfqfbpªcoljª^kªfkaf * sfarîª_^khªc^firobª_lqeªqlªlqeboª_^khpª^kaªqebk`bªqlªqebªtfaboªb`lkljvªôbªgrpq plªjrèªdob^qbo+ªLkbªlcªqebªhbvªmromlpbpªlcª_^khªobdri^qflkªfpªqlªfkqbokîfwbªqeb pl`fîª`lpqpªlcªmlqbkqfîª_^khªc^firobpªsf^ª`^mfqîªâbnr^`vªobnrfobjbkqp+ªQebªobd * ri^qflkªlcª_^khpªjrpqªalªjlobªqe^kªfkpqfiª_bpqªmo^`qf`bª^jlkdpqª_^khbop)ªloª`lk * sbodbªobdri^qlo vª`^mfqîªqlªqebª`^mfqîª^ªmorabkqfîª_^khªtlriaªlqebo tfpbªelia+ Qebª`roobkqª^mmol^èªqlªpvpqbjf`ªobdri^qflkªfjmif`fqivª^pprjbpªqe^qªtbª`^kªj^hb qebªpvpqbjª^pª^ªtelibªp^cbª_vªpfjmivªqovfkdªqlªj^hbªprobªqe^qªfkafsfarîª_^khpªôb p^cb+ªQefpªplrkapªifhbª^ªqorfpj)ª_rqªfkªmo^`qf`bªfqªobmobpbkqpª^ªcîi^`vªlcª`ljmlpf * qflk+ªFkªqovfkdªqlªj^hbªqebjpbisbpªp^cbo)ª_^khp)ª^kaªlqeboªefdeivªibsbo^dbaªcfk^k* `fîªfkqbojbafôfbp)ª`^kª_be^sbªfkª^ªt^vªqe^qª`liib`qfsbivªrkabojfkbpªqebªpvpqbj+ Pbiifkdª^kª^ppbqªtebkªqebªmof`bªlcªofphªfkòb^pbp)ªfpª^ªmorabkqªobpmlkpbªcoljªqeb mbopmb`qfsbªlcª^kªfkafsfarîª_^kh+ª?rqªfcªj^kvª_^khpª^`qªfkªqefpªt^v )ªqebª^ppbq mof`bªtfiiª`lii^mpb)ªclo`fkdªfkpqfqrqflkpªqlªq^hbªvbqªcroqeboªpqbmpªqlªob`qfcvªqebªpfqr * ^qflk+ªFqªfp)ªfkªmôq)ªqebªobpmlkpbpªlcªqebª_^khpªqebjpbisbpªqlªprèªmobpprobpªqe^q ibâpªqlªdbkboîfpbaªabìfkbpªfkª^ppbqªmof`bp)ª^kaªbke^k`baª`loobi^qflkpª^kaªsli^qfi* fqvªfkª^ppbqªjôhbqp+ªPrèªbkaldbkbfqvªlcªofph)ªabpòf_baªcroqeboªfkª@e^mqboª/)ªfp dob^qboªqebªjlobªqebobªfpª^ª`ljjlkªaofsboªlcª_be^sflro + Cfk^k`fîªò^pebpªalªklqªl``roªo^kaljiv)ª_rqªdbkboîivªcliiltª_lljp+ªQeolrde ^ªkrj_boªlcª^sbkrbp)ªpljbªobdri^qlo v)ªpljbªklq)ªqelrdeªlcqbkªfkªqebªk^jbªlc ofph*pbkpfqfsfqv)ªplmefpqf`^qflkª^kaªjlabokfqv)ªqebªolibªlcª`roobkqªjôhbqªmof`bpªlk _be^sflroªe^pªfkqbkpfcfba+ªQebpbª^sbkrbpªfkìrabªjôh*ql*jôhbqªsîr^qflkªlc ^ppbqp8ªobdri^qlovª^mmolsbaªjôhbq*_^pbaªjb^probpªlcªofph)ªprèª^pªòbafqªabc^riq pt^mªpmobâpªfkªfkqbokîªòbafqªjlabipªloªmof`bªsli^qfifqvªfkªjôhbqªofphªjlabip8 ^kaªqebªfkòb^pfkdªrpbªlcªòbafqªo^qfkdp)ªtefèªqbkaªqlª_bª`loobi^qba)ªafob`qflkîiv ^qªib^pq)ªtfqeªjôhbqªmof`bp+ª Geneva11_latest.qxp 07/05/2009 16:48 Page xii

xii The Fundamental Principles of Financial Regulation

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Foreword xiii

âsbopbªpeloq*qbojªcrkafkdª^kaªbk`lro^dbªqebjªqlªpbbhªilkdbo*qbojªcrkafkd+ª >ª`lj_fk^qflkªlcªqebpbªèôdbpªpelriaªmrpeª_^khpªqlªabsbilmªfk`bkqfsbªm^`h * ^dbpªqe^qªôbªjlobªbk`lro^dfkdªlcªilkdbo*qbojª_be^sflro)ª^pªtbªlrqifkbªfkª@e^mqbo 3+ª>ªifqqibªjlobªfpªobnrfobaªlkªqefpªcolkq)ªqelrdeªtbªalªklqªpeôbªqebªwbîªlcªpljb cloªdlsbokjbkqpªqlª_bªfkslisbaªfkªqebªjfòl*ab`fpflkpªlcªmofs^qbªcfojp+ª Qebobªfpª^ªqbkabk`v )ª`ljjlkivªl_pbo sbaª^jlkdpqªmlifqf`f^kp)ªqlªobsfbtªqeb pqor`qrobªlcªqebªobdri^qlovªpvpqbjª_bclobª`lkpfabofkdªqebªmlqbkqfîªfkpqorjbkqpªql ^èfbsbª_bqqboªobdri^qlo vª`lkqoli+ªLroªmlpfqflk)ª@e^mqboª4)ªfpªqebªobsbopb+ªQeb pqor`qrobªlcªobdri^qflkªpelriaªobcib`qªqebªmromlpbpª^kaªmltbopªlcªqebªobdri^qlo v ^rqelofqfbp+ªJ^òl*morabkqfî)ª^kaªjfòl*morabkqfî)ªfkpqorjbkqpªôbª_lqeªkbba * ba)ª_rqªafccboªfkªcl`rpª^kaªfkªqebfoªkbbabaªmolcbppflkîfpj+ªEbk`b)ªqebvªpelriaª_b `ôofbaªlrqªpbmô^qbiv )ªobpmb`qfsbivª_vª@bkqoîª?^khpª^kaª_vªCfk^k`fîªPbo sf`bp >rqelofqfbp+ª>d^fk)ªcfk^k`fîª^kaª^ppbq*mof`bª`vìbpªafccboªcoljª`lrkqovªqlª`lrkqov+ Plª`lkqo^*`vìf`îªmlif`vªkbbapªqlª_bª^pprjbaªjlobª_vªqebªelpqª`lrkqo v)ªqebob_v pefcqfkdªpljbªlcªqebªbjme^pfpªfkªobdri^qflkªcoljªqebªeljbªqlªqebªelpqª`lrkqo v+ª ?bpfabpªlroªhbvªob`ljjbka^qflkpªlkªj^òl*morabkqfîªjb^probpª^kaªjôh*ql* crkafkd)ªtbªj^hbªmolmlpîpªlkª^ªtelibªpbofbpªlcªjfkloªfpprbp)ªprèª^pªqebªolibªlc pqobppªqbpqp)ªqebªâlmqflkªlcªjûfjrjªil^k*ql*sîrbªo^qflpªfkªjloqd^dbªjôhbqp) bq`+)ªbq`+ªQebpbªôbªd^qebobaªrmª^kaªobmloqbaªfkªlroª`lkìrpflk)ª@e^mqboª5+ªObîiv _rpvªobâbopª`lriaªphfmªpqo^fdeqªqebob+ªLsboîiªlroªfkqbkqflkªfpªqlªabsbilmª^ªmol * do^jªlcªmo^`qf`îªfkfqf^qfsbpªqe^qª`lriaª_bqqboª^qq^`hªqebªhbvªcb^qrobpªlcªbuqbokîf * qfbpª^kaªpvpqbjf`ªc^firobªfkªcfk^k`fîªjôhbqp+ª Geneva11_latest.qxp 07/05/2009 16:48 Page xiv Geneva11_latest.qxp 07/05/2009 16:48 Page xv

Executive Summary

Qebobªfpª^ªtfabpmobâªsfbtªqe^qªqebª@obafqª@orkèªlcª/--4*6ªt^p)ªfkªmôq)ª^ªobpriq lcªfkprccf`fbkqªob^èªlcªobdri^qflkª^kaªqe^qª^ªplirqflkªfpªqlªq^hbªbufpqfkdªobdri^qflk ^kaªpmobâªfqªjlobª`ljmobebkpfsbivª^òlppªjlobªfkpqfqrqflkpª^kaªgrofpaf`qflkp+ Qe^qªtlriaª_bª^kªfk`loob`qªaf^dklpfp+ªª>qªqebªebôqªlcªqebªòfpfpªtbobªefdeivªobdr * i^qbaªfkpqfqrqflkpªfkªobdri^qbaªgrofpaf`qflkp+ªQebªòfpfpªe^pªfkslisbaª^ªobdri^qlo v c^firobª^pªjrèª^pª^kvqefkdªbipb+ªLroªplirqflkªfpªklqªjlobªobdri^qflkªmboªpb) qelrdeªqe^qªj^vªtbiiª_bªobnrfobaªfkªpljbªôb^p)ª_rqª_bqqboª^kaªafccbobkqªobdri^ * qflk+ªQefpªfpªklqªqebªcfopqª_^khfkdªòfpfpªqe^qªqebªtloiaªe^pªpbbk+ªFqªfpªjlobªifhbivªql _bªkbôboªqebªlkbªerkaobaqe+ªFcªòfpbpªhbbmªobmb^qfkdªqebjpbisbp)ªmlif`vªpelria è^kdb+ª?rqªfqªîplªjb^kpªqe^qªmlif`vªj^hbopªpelriaªklqªprmbocf`fîivªlsbo*ob^`qªql qebªmôqf`riôªèô^`qbopª^kaª`lilroªlcªqebª`roobkqªòfpfp+ªPèâbkcobrabª^qª_^khbopÖ bumbkpbªfpªp^qfpcvfkd)ª_rqªfqªalbpªklqªobîivªdbqªrpª^kvtebob+ªQebªòfpfpªpelriaª_bª^ `îiªqlªobjbavªcrka^jbkqîªjôhbqªc^firobpªqe^qªe^sbªbfqeboª_bbkªfdklobaªlo fjmolmboivªabîqªtfqeªfkªlroªobdri^qflkªplªcô +ªª

Systemic risks

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xv Geneva11_latest.qxp 07/05/2009 16:48 Page xvi

xvi The Fundamental Principles of Financial Regulation

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Risk and the economic cycle

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Micro and macro-prudential regulation

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Executive Summary xvii

>qªqebª`bkqobªlcªqefpªDbkbs^ªObmloqªfpªqebªmolmlpîªqlªj^hbª`^mfqîªobnrfob * jbkqpª`lrkqbo*`vìf`î+ªFkªmo^`qf`îªqbojpªtbªob`ljjbkaªobdri^qlopªfkòb^pbªqeb bufpqfkdª`^mfqîªâbnr^`vªobnrfobjbkqpª%_^pbaªlkª^kª^ppbppjbkqªlcªfkebobkqªofphp& _vªlkb)ªloªmboe^mpªqtl)ªjriqfmibp+ªT bªt^kqªqlªfkqbo^`qªj^òl*morabkqfîªtfqe jfòl*morabkqfîªobdri^qflkpª%bppbkqfîivª?^pbiªFF&ªcloªqtlªj^fkªob^plkp)ªo^qebo qe^kª^_^kalkfkdª?^pbiªFFªîqldbqebo +ªCfopq)ªjfòl*morabkfqîªobdri^qflkªobj^fkp sîfaª^kaªkb`bppôv8ªfqªfpªgrpqªfkprccf`fbkqªlkªfqpªltk+ªPb`lka)ªfqªfpªb^pfboªqlªj^kfm* ri^qbª%qlªÖd^jbÖ&ªb^èªfkafsfarîªobdri^qflkªlkªfqpªltk)ªqe^kªtebkªqebvªtloh qldbqebo+ Qebªcfopqªjriqfmifboªfpªobi^qbaªqlª^_lsbª^sbo^dbªdoltqeªlcªòbafqªbum^kpflkª^ka qlªibsbo^db+ªObdri^qlopª^kaª`bkqoîª_^khbopªpelriaª^dobbªlkªqebªabdobbªlcª_^kh ^ppbqªdoltqeª^kaªibsbo^dbªqe^qªfpª`lkpfpqbkqªtfqeªqebªilkd*orkªqôdbqªcloªkljfkî DAM+ªQebªjriqfmibªlkª`^mfqîªèôdbpªofpbpªqebªjlobªòbafqªbum^kpflkªbu`bbapªqefp qôdbq+ªQebªmromlpbªlcªqefpª`^mfqîªèôdbªfpªklqªqlªbifjfk^qbªqebªb`lkljf`ª`vìb) pljbqefkdªtefèªtlriaªobnrfobªrpªqlªe^sbª^kª^_fifqvªqlªclob`^pqªqebª`vìbª_bqqbo qe^kªtbª`^k)ª_rqªqlªib^kª^d^fkpqªqebªtfkaª^kaªbkprobªqe^qª_^khpªôbªmrqqfkdª^pfab ^kªfkòb^pfkdª^jlrkqªlcª`^mfqîªfkª^kªrm*`vìbªtebkª`roobkqivª^s^fi^_ibªofphªjb^p* robpªtlriaªprddbpqªqe^qªqebvª`^kªp^cbivªibsbo^dbªjlob+ªQefpªbuqo^ª`^mfqîª`^kªqebk _bªobib^pbaªtebkªqebª_lljªbkapª^kaª^ppbqªmof`bpªcîiª_^`h+ªQebª`lrkqbo*`vìf`î èôdbªpelriaªpbosbªqlªjlabo^qbªqebª_llj*_rpqª`vìb+ª Qebªpb`lkaªjriqfmibªlkª`^mfqîªèôdbpª`lriaª_bªobi^qbaªqlªqebªjfpj^qèªfkªqeb j^qrofqvªlcª^ppbqpª^kaªif^_fifqfbp+ª>iqbok^qfsbivªqebª@bkqoîª?^khª`lriaªibsvª^ªsôv* fkdªmobjfrjªcloªfkprofkdª^d^fkpqªifnrfafqvªofph)ª^d^fkªobi^qbaªqlªjfpj^qè+ªLkbªlc qebªj^fkªibpplkpªlcªqebª@o^peªlcª/--4,5ªfpªqe^qªqebªofphªlcª^kª^ppbqªfpªpr_pq^kqfîiv fkcirbk`baª_vªqebªj^qrofqvªlcªfqpªcrkafkd+ªKloqebokªOl`hª^kaªlqeboª`^prîqfbpªlc qebªò^peªjfdeqªtbiiªe^sbªprosfsbaªtfqeªqebªp^jbª^ppbqpªfcªqebª^sbo^dbªj^qrofqvªlc qebfoªcrkafkdªeâª_bbkªilkdbo +ªFcªobdri^qlopªj^hbªifqqibªafpqfk`qflkªlkªeltª^ppbqp ôbªcrkaba)ªcfk^k`fîªfkpqfqrqflkpªtfiiªobivªlkªèb^mbo )ªpeloq*qbojªcrkafkd)ªtefè fkòb^pbpªpvpqbjf`ªco^dfifqv+ªQefpª`^kª_bªlcc*pbqªqeolrdeªqebªfjmlpfqflkªlcª^ª`^mfqî èôdb)ªloªmobjfrj)ªqe^qªfpªfksbopbivªobi^qbaªqlªqebªj^qrofqvªlcªcrkafkdªlcªprè ^ppbqpª^pª`^kklqªklojîivª_bªmlpqbaª^qªqebª`bkqoîª_^khªcloªifnrfafqv +ª Qlªcroqeboªobar`bªqebªpmfoîªlcªpîbpªfkª^ªòfpfpª^kaªqlªprmmloqªcfk^k`fîªfkpqfqr * qflkpªfkªibkdqebkfkdªqebªj^qrofqvªlcªqebfoªcrkafkd)ªtbªîplªmolmlpbªqe^qªfkpqbâ lcªprpmbkafkdªjôh*ql*jôhbqªsîrbª^``lrkqfkd)ªcfk^k`fîªfkpqfqrqflkpª`lriaª`lj* mibjbkqªjôh*ql*jôhbqª^``lrkqfkdªtfqeªjôh*ql*crkafkdªsîr^qflkp)ªtefè tlriaª_bªjlobª^mmolmof^qbªcloª^ppbppfkdªofphª^kaª`^mfqîªâbnr^`v +ª

Not all financial institutions are alike

Klqªîiªcfk^k`fîªfkpqfqrqflkpªmlpbªpfjfiôªpvpqbjf`ªofphp+ªObdri^qflkªpelria ^`hkltibadbªqe^qªpljbª_^khpªôbªpvpqbjf`îivªfjmloq^kqª^kaªqebªlqebopªôbªibpp pl+ªTbªmolmlpbªqe^q)ªfkªb^èª`lrkqov)ªprmbosfplopªpelriaªabqbojfkb)ª%_rqªklqªmr_* if`fpb&)ªtefèªôbªqebªpvpqbjf`îiv*fjmloq^kqªfkpqfqrqflkpªqe^qªkbbaªìlpboªpòrqfkv ^kaªdob^qboª`lkqoli+ª >iiª_^khp)ª^kaª^kvªlqeboªcfk^k`fîªfkpqfqrqflkªpr_gb`qªqlªabmlpfqªfkpro^k`b) pelriaªîplª_bªpr_gb`qªqlªpljbª%ilt&ªjfkfjrjª`^mfqîªobnrfobjbkqª^pª^ªmolqb`qflk cloªqebªabmlpfqªfkpro^k`bªcrka+ªPvpqbjf`îiv*fjmloq^kqªfkpqfqrqflkpªtlriaª_bªpr_ * Geneva11_latest.qxp 07/05/2009 16:48 Page xviii

xviii The Fundamental Principles of Financial Regulation

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Global arrangements for global banks

>klqeboª`ljjlkªsfbtªfpªqe^qªcfk^k`fîªfkpqfqrqflkpªôbªdil_îª^kaªplªcfk^k`fîªobd* ri^qflkªkbbapªqlª_bªdil_î+ªQefpªfpªmlbqf`)ª_rqªqebªafpeôjlkflrpªobîfqvªfpªqe^q jlobªfkqbok^qflkîªjbbqfkdpªtlriaªklqªe^sbª^sboqbaªqebªòfpfpª^kaªqebªòfpfpªe^p q^rdeqªrpªqe^qªqebobªfpªjrèªtbªkbbaªqlªalª^qªqebªk^qflkîªibsbiªqlªpqobkdqebkªobd* ri^qflk+ª@lrkqbo*`vìf`îªèôdbpª^kaªèôdbpªcloªifnrfafqvª`^kklqª_bªfjmibjbkq * baªloªpbqªdil_îivª_rqªkbbaªqlª_bªalkbªk^qflkîiv +ªQebobªfpª^ªìbôªkbbaªcloªfkclo * j^qflkªpeôfkdª^kaª`l*loafk^qflkªlcªqebªmofk`fmibp lcªobdri^qlovª^`qflkp)ª_rqªfkªqeb ^`qrîª^mmif`^qflkªlcª%fkqbok^qflkîivª^dobba&ªmofk`fmibpªlcªoribpª^kaªprmbo sfpflk) tbªob`ljjbkaª^ªptfqèª_^`hªcoljª"eljbª`lrkqov"ªobdri^qflkªqltôapª]elpqª`lrk* qov$ªobdri^qflk+ªT bª_bifbsbªqefpª`lriaªe^sbªqtlªcroqeboª_bkbcfqp+ªCfopq)ªfcªclobfdk _^khpªtbobªobnrfobaªqlªpbqªrmªqebfoªil`îªmobpbk`bª^pªfkabmbkabkqªpr_pfafôfbpªqe^q jfdeqªtfqepq^kaªqebªabc^riqªlcª^kªfkqbok^qflkîªmôbkq)ªfqªtlriaªobar`bªbumlprob qlªiûªgrofpaf`qflkpªjlobªbccb`qfsbivªqe^kªqo vfkdªqlªclo `bªîiªqlªcliiltª^ªpq^kaôa qe^qªtlriaªifhbivª_bªfk^mmolmof^qbªqlªj^kv+ªPb`lka)ªtefibªqefpªj^vªpbbjª`lrkqbo qlªqebªqeorpqªlcªBrolmb^kªfkfqf^qfsbp)ªk^qflkîiv*_^pbaª`lrkqbo*`vìf`îªèôdbp `lriaªdfsbªqebªbrolªôb^ª%loª^kvªlqeboª`ljjlk*`roobk`vªôb^)ªclojîªloªlqebo * tfpb&ª^ªjrèªkbbabaªâafqflkîªmlif`vªfkpqorjbkqªqe^qª`lriaªmolsfabª^ªjlobªafc * cbobkqf^qbaªobpmlkpb)ªqe^kª^ªpfkdibªfkqbobpqªo^qbª`^k)ªqlª^kª%^ppbqªmof`b&ª_lljªfk lkbªjbj_boªpq^qbª^kaªpq^dci^qflkªfkª^klqebo+

Final word

Qebªmobsflrpªcl`rpªlkªjfòl*morabkqfîªobdri^qflkªkbbapªqlª_bªprmmibjbkqbaª_v j^òl*morabkqfîªobdri^qflk+ªTefibªtbª`^kklqªelmbªqlªmobsbkqªòfpbpª`ljmibqbiv ) tbª`^kªmboe^mpªj^hbªqebjªcbtboª^kaªjfiaboª_vªâlmqfkdª^kaªfjmibjbkqfkdª_bq * qboªobdri^qflk+ª Geneva11_latest.qxp 07/05/2009 16:48 Page 1

1 Analytical Background

Qebobªfpª^ªs^pqª_lavªlcªcfk^k`fîªobdri^qflkªfkªbufpqbk`b+ªQefpªfpªklojîivªbuqbka * baªfkòbjbkqîiv)ªcobnrbkqivªqlªìlpbª^ªillmelibªtefèªpljbªbôifboªco^raªloªcfk^k* `fîªafp^pqboªe^pªbumlpba+ªBsbkªprèªjb^probpª^pªj^vªe^sbªpbbjbaªqlªfkslisbª^ªafp* òbqbªgrjmªfkªqebªobdri^qlo vªmol`bpp)ªprèª^pªqebªm^pp^dbªlcªqebª?^pbiªFª>``loaªfk .655)ªqrokªlrq)ª^cqboªìlpboªfkpmb`qflk)ªqlªe^sbª_bbkªiôdbivª^kª^qqbjmqªqlª^dobb lk)ª^kaªqlªeôjlkfpb)ªmob*bufpqfkdªÖ_bpqªmo^`qf`bpÖªfkªqebªhbvªk^qflkªpq^qbp)ªtfqe * lrqªjrèªlsboqª^qqbjmqªqlªo^qflkîfpbªqebjª^d^fkpqªcrka^jbkqîªmofk`fmibp)ªlo rkaboivfkdªqeblo v+ªBu`bmqflkpªl``roªlkivª^cqboªj^gloªòfpbp)ª^pªfkªqebªRP>ª^cqbo .6/6*00)ª%tfqeªDi^pp*Pqb^dîiª^kaªabmlpfqªfkpro^k`b&)ª^ka)ªmboe^mp)ªklt + Qebobªôbªdllaªob^plkpªcloªprèª^kªfkòbjbkqîª^mmol^èªrkaboªklojîª`fo * `rjpq^k`bp+ªIfhbªqebª`ljjlkªi^t )ªfqª_rfiapªlkªqebª^`òrbaªtfpaljªlcªdbkbo^ * qflkp+ªFqªfpªmo^`qf`^_ib)ªal*^_ibª^kaª%dbkboîiv&ª`ljjlk*pbkpf`î+ªV bqªfqªfpªmlppf_ib cloªprèª^kªfkòbjbkqî)ª^kaªdbkboîivªob^`qfsb)ªmol`bppªqlªjfdo^qbªlsboªqfjbªfk tolkd)ªloªgrpqªfkcboflo)ªafob`qflkp+ªTebkª^ªj^gloªòfpfpªbormqp)ªprèª^pªqe^qªtefè e^pªolfibaªcfk^k`fîªpvpqbjpªfkªqebªtloiaªpfk`bª>rdrpqª/--4)ªqebobªfpª_lqeª^ª`^pb ^kaª^kªlmmloqrkfqvªcloªobsfpfqfkdªqebªrkaboivfkdªmofk`fmibpªlcª%cfk^k`fî&ªobdri^ * qflkªqlªbu^jfkbªtebqeboªqebªbufpqfkdªpvpqbjªfpª^mmolmof^qbivªabpfdkba+ªQebobªfpª^ dbkboîªtfiifkdkbppªkltªqlªnrbpqflkªbufpqfkdªobdri^qlo vªmo^`qf`bpª^kaªqlª`lkpfabo) tfqelrqªmobgraf`b)ª^ªtfabªo^kdbªlcªîqbok^qfsbªmolmlpîp+ªKlqefkdª^qªqefpªgrk`qrob fpªqllªeîiltbaª_vªqoâfqflkª^kaªrp^dbªqlªbp`^mbªnrbpqflkfkdª^kaªqlª_bªlcc*ifjfqp qlªobcloj+/ Fkªmôqf`riô)ªqebªobdri^qlovªpvpqbjªpq^kapª^``rpbaªlcªe^sfkdªc^fibaªql jfqfd^qbªqebªob`bkqª`vìbªfkªibsbo^db)ªòbafqªbum^kpflkª^kaªelrpfkdªmof`bp+ Klqefkdªt^pªalkbªqlªqfdeqbkªobdri^qflkpª%b+d+ªlkª`^mfqî)ªifnrfafqvªloªobjrkbo^ * qflk&ªfkªqebªrmptfkd)ªklo )ªrkqfiªob`bkqiv)ªqlªobiûªqebªmol*`vìf`îªfjmif`^qflkpªlc qebª^``lrkqfkd,obdri^qlovªco^jbtlohªfkªqebªaltkqrok+ªObdri^qflk)ªfkªbccb`q)ªmol * sfabaªifqqibªloªklªèb`h)ªkloª_ôofbo )ªqlªqebªab`fpflkpªq^hbkª_vª_^khp)ª^kaªlqebo cfk^k`fîªlmbo^qlop)ªfkªqebfoªmroprfqªlcª%peloq*qboj&ªmolcfqªjûfjfp^qflk+ªFqªt^pªklq â^mqbaªqlªè^kdbpªfkªqebªrkaboivfkdªsrikbo^_fifqfbpªfkªqebªpvpqbjª^pª^ªtelib)ª%^p pljbªlcªrpªeâªtôkbaªbôifbo )ªfkªA^kfbipplkªbqªî+)ª/--.&)ª^kaªîiltbaªcfk^k`fî bkdfkbbofkdªqlª^slfaªfqpªfjm^`q)ªb+d+ªPFSpª^kaªlqeboªjbqelapªlcªab`lkplifa^qfkd ofphp+ Te^qªfpªkbbabaªfp)ªcfopq)ª^ªobpq^qbjbkqªlcªqebª_^pf`ªl_gb`qfsbpªlcªcfk^k`fîªobdr * i^qflkª^ka)ªqebk)ª^kª^ppbppjbkqªlcªtebqeboªqebª`roobkqªobdri^qlo vªco^jbtlohªfp tbiiªpqor`qrobaªqlª^qq^fkªprèªl_gb`qfsbp)ª^ka)ªfcªklq)ªqlªbumilobªte^qª`^kª_bªalkb qlªobpqor`qrobªprèªobdri^qflkªplªqe^qªfqªalbp+ª Plªibqªrpªpqôqª_vª^phfkdªte^qªpelriaª_bªqebªmromlpbpªlcªobdri^qflk+ªQ oâfqflkî

1 Geneva11_latest.qxp 07/05/2009 16:48 Page 2

2 The Fundamental Principles of Financial Regulation

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Analytical Background 3

abmlpfqªfkpro^k`bª`lomlo^qflk)ª@AF@)ªe^pªjâbª^ªpr``bppcriª^qqbjmqªîlkdªprè ifkbp&+ªEltbsboª^tcri)ª^kaªofphv )ªprèª^ª_^khªj^vª_b)ªloªj^vª_b`ljb)ªfqª`^k ît^vpªo^fpbªbuqo^ªcrkap)ªlk`bª.--"ªfkproba)ª_vªo^fpfkdªfkqbobpqªo^qbpªpifdeqiv ) %rkqfiª^kaªrkibppªqebªprmbo sfplopªìlpbªfqªaltk&+ªFkªloaboªqlªmobsbkqªqebªtlopq bu`bppbpªlcªjloîªe^wôa)ª^kaªqlªmolqb`qªqebªqûªm^vbo )ªqebobªfpª^ªkbbaªcloª^ª jfkf* jrj ibsbiªlcª`^mfqî)ªtefè)ªfcª_ob^èba)ª^`qpª^pª^ªqofddboªcloªmoljmqª`loob`qfsb ^`qflkª%M@>&+ªPrèª^ªjfkfjrjªibsbiªlcª`^mfqîªalbpªklqªmolsfabª^kvªmolqb`qflkªclo qebªpeôbeliabopª^kaª_^khªlccf`bop)ªo^qeboªqebªobsbopbª^pªfqªfpª^kªfkqbkqflkî elpq^db)ªdfsfkdªqebjªkb`bppô vªÖphfkªfkªqebªd^jbÖ+ªKloªalbpªfqªmolsfabª^kv obpfifbk`bªqlªqebª_^khfkdªpvpqbj)ª%lkivªqebª_rccboª^_lsbªprèª^ªjfkfjrjªmolsfabp qe^q&)ªbu`bmqªfkªplªcôª^pªM@>ªîiltpªcloª^kªloaboivªork*altk)ªo^qeboªqe^kªafp * qobppbaªpîbpª^kaª^ªkbtp*tloqevª_^khormq`v)ªlcª^ª_^khªfkªpbsbobªafccf`riqfbp+ >pªe^pª_bbkªìbôivªpbbkªfkª/--4,5)ª%0&ªfpª_vªcôªqebªjlpqªfjmloq^kqªob^plkªtev _^khp)ª^kaª`boq^fkªlqeboªhbvªcfk^k`fîªfkqbojbafôfbpª^kaªjôhbqp)ªkbbaªobdri^ * qflk+ª?rqªtevªalbpªqebªc^firobªlcª_^khp)ª^kaªlcªpljbªlqeboªcfk^k`fîªfkpqfqrqflkp) fkslisbªpvpqbjf`ªbuqbokîfqfbpªqe^qªôbªklqªmobpbkqªtebkª^kªloafkô vªj^krc^`qro* fkdªloªpbosf`b*pb`qloªcfojªdlbpª_rpq+ªQebª_^pf`ª^kptboª`ljbpªcoljªqebªc^`qªqe^qªqeb c^firobªlcª^ª_^khfkd*qvmbªfkpqfqrqflk)ªp^vªIbej^kª?olp)ªKloqebokªOl`hªloªDifqkfo ) tb^hbkpªqebªlqeboª_^khpª^kaªcfk^k`fîªjôhbqpªtfqeªtefèªqebvªtbobªfkslisba) tebob^pªqebªc^firobªlc)ªp^v )ª^ª`ôª`ljm^kvªloª^ªi^rkao vªqbkapªqlªpqobkdqebkªqeb obj^fkfkdª`ljm^kfbpªfkªqebªp^jbªpb`qlo )ª_vªobjlsfkdª^ª`ljmbqfqlo +ª>kaªivfkd _befkaªqefpªfpªqebªbsbkªjlobªfjmloq^kqª`lkpfabo^qflkªqe^qªqebª`lkqfkrbaªebîqe lcªqebªcfk^k`fîªpvpqbj)ª^kaªbsbkªjlobªplªlcªqebª_^khfkdªpb`qloªtfqefkªfq)ªfpªhbv qlªqebªp^qfpc^`qlo vªcrk`qflkfkdªlcªqebªtfaboªb`lkljv )ªqlª^ªnrîfq^qfsbivªafccbobkq buqbkqªcoljªjlpqªlqeboªpb`qlop+ Qebobªôb)ª^qªib^pq)ªcfsbªob^plkpªcloªprèªkbd^qfsbªbuqbokîfqfbp+ªQebªcfopqªfpªmrob fkcloj^qflkîª`lkq^dflk)ªmôqf`riôivªfkªqebª`lkqbuqªlcªfkqbojbafôfbpªtfqeª^ j^qrofqvªjfpj^qèª_bqtbbkªif^_fifqfbpª^kaª^ppbqpª%pbbª@e^mqboª2&+ªFcª_^khª>ªc^fip) qefpªqeoltpªjlobªalr_qªlkªqebª`lkqfkrbaªplisbk`vªlcª_^khª?)ªtebkª?ªfpªmbo`bfsba ^pª_bfkdªlcªqebªp^jbªqvmbª^pª>+ªTebkªprèªalr_qªôfpbp)ªabmlpfqlopª^kaªibkabopªql ?ªilpbª`lkcfabk`b)ªtfqeao^tªqebfoªcrkap)ª`^rpfkdª^ªpraabkªifnrfafqvªmol_ibjªcloª?8 qefpªjlsbpªobi^qfsbªfkqbobpqªo^qbp)ª^kaª^``bppªqlªcrkap)ª^d^fkpqª?)ªj^hfkdªfqpªcrqrob plisbk`vªbsbkªjlobªqeob^qbkba+ªQerpªqebªc^firobªlcªIbej^kª?olpªo^mfaivªibaªqlªqeb bkaªlcªqebªRPªPb`rofqfbpªElrpbªjlabi)ª%tfqeªJboofiiªI vkèª_bfkdªclo `baªfkqlª^ jbodboªtfqeª?^khªlcª>jbof`^)ª^kaªDliaj^kªP^èpª^kaªJlod^kªPq^kibvª_b`ljfkd _^khp&+ªFcªKloqebokªOl`hªeâª_bbkªîiltbaªqlªc^fi)ªqebobªjfdeqªe^sbª_bbkªorkpªlk ?oâcloaª^kaª?fkdibvª^kaªlkª>iif^k`bª^kaªIbf`bpqboªqebªkbuqªa^v)ª^kaªlkªE?LPªlk qebªcliiltfkdªa^v+2 QebªabjfpbªlcªDifqkfoªfkªF`bi^kaªt^pªo^mfaivªqo^kpi^qbaªfkqlªqeb `lii^mpbªlcªI^kap_^khfª^kaªH^rmqefkd+ªQebpbªi^pqªqtlªbu^jmibp)ªeltbsbo)ªfkaf`^qb qe^qªtefibªqebªpfwbªlcªqebª_^khªfkªafccf`riqfbpªmi^vpª^ªolibªfkªqebªpmobâªlcªobpriqfkd `lkq^dflk)ªfqªfpªklqªqebªlkivªc^`qlo +ªFcªqebªc^fifkdª_^khªfpª%mbo `bfsbaª^p&ªpfjfiôªql lqeboª_^khp)ª^kaªqebª`^rpbªlcªfqpªc^firobªj^vª^mmivªqlªqebjªîpl)ªqebkªifhb KloqebokªOl`hª^kaªDifqkfoªfqªtfiiª_bª`lkq^dflrp+ªFc)ªeltbsbo )ªfqªfpªmbo `bfsbaª^p _bfkdª^ªrkfnrbªlrqifboª%b+d+ª?@@F&)ªloªfcªqebª`^rpbªlcªilppªfpªmôqf`riôªqlªqe^qª_^kh) ^kaªklqª^mmif`^_ibªqlªfqpªìlpbª`ljmbqfqlop)ª%klq^_ivªtebkªôfpfkdªcoljªco^ra)ªb+d+ ?ôfkdpª^kaªKf`hªIbbplk)ªPl`ªDbkª^kaªGboljbªHbosfbi&)ªqebkªqebobªfpªjrèªibppªofph lcªafob`qª`lkq^dflk+ ?rqªtfiiªklqªqebªp^jbªôdrjbkqª^mmivªqlªlqeboªklk*_^khª`ljm^kfbp<ªFcª`ôªmol* Geneva11_latest.qxp 07/05/2009 16:48 Page 4

4 The Fundamental Principles of Financial Regulation

ar`boª>ªc^fip)ªfqªfpªifhbivªqlª_bªarbªqlª^ªdbkboîfpbaªcîiªfkªabj^kaªcloª`ôp+ªTfiiªklq qefpªibâªibkabopªqlª`ôªmolar`boª?)ªtebqeboªlkª`ljjbo`fîªm^mbo)ªqoâbªòbafqª^ka _lkapªqlªobcrpbªqlªobkbtªloªoliiªlsbo)ªbsbkªabpmfqbªqebªdob^qboªabj^kaªcloª?Öpªmola* r`qp<ªQebªc^firobªlcªqebª`ôª`ljm^kv )ªeltbsbo)ªalbpªklqªe^sbªprèª^kªfjmloq^kq pfdkîifkdªbccb`qªcloªfqpª`ljmbqfqlop+ªFcªqebªabj^kaªcloª`ôpªcîip)ªqefpªfpªbsfabkqªql ibkabopªtbiiª_bclobªqebªcfopqª`ljm^kvªc^fip+ªQebªc^firobªlcªlkbª`ôª`ljm^kvªjb^kp qe^qªqebªobj^fkfkdª`ljm^kfbpªtfiiªalª_bqqbo )ªklqªtlopb+ 3 Jloblsbo)ªjlpqª`loml * o^qbpª^kaªj^kvªelrpbeliapªe^sbª^ª`lkqfkdbkqªifkbªlcªòbafqªtfqeªqebfoª_^kh)ªql qfabªqebjªlsboªprèªafccf`riqfbp)ªrkqfiªqebvª`^kªobpqlobªqebfoªltkªmlpfqflkª_vª`rq * qfkdª`lpq)ªloªfkòb^pfkdªmolcfqpªlkªpîbp)ª^cqboªqebfoª`ljmbqfqloÖpªc^firob+ªPlªklk* _^khpªobivªlkª_^khpªfkª^ªòfpfp)ªtefibª_^khpªfkªqrokªe^sbªqlªobivªlkªqebª@bkqoî ?^kh+ Qefpªibâpªlkªqlªqebªob^plkªcloªqebªpb`lkaªbuqbokîfqvªôfpfkdªcoljª_^khªc^firobp) tefèªfpª^ªilppªlcª^``bppªqlªcrqrobªcrkafkdªcloªqebªc^fibaª_^khÖpª`rpqljbop+ªLc `lropb)ª^ªìfbkqªlcªc^fibaª_^khª>ª`^kªqo vªqlªqo^kpcboªeboª`rpqljªqlªpro sfsfkdª_^kh ?)ª_rqª_^khª?ªtfiiªe^sbªibppªafob`qªfkcloj^qflkªlkªqefpªìfbkq)ª^kaªfpªifhbiv )ªbpmb* `fîivªfkªqebªifhbivª`lkafqflkpªlcªcbôª^kaªm^kf`ªproolrkafkdªj^gloªfkpq^k`bpªlc _^khªc^firob)ªlkivªqlªmolsfabªobmi^`bjbkqªòbafqªc^`fifqfbpªlkªjrèªqlrdeboªqbojp+ >ª_^khªc^firobª`^rpbpª^kªbuqbokîfqvªfkªqebªdrfpbªlcªqebªilppªlcªpmb`fcf`ªfkcloj^qflk ifkhpª_bqtbbkªqebªc^fibaª_^khª^kaªfqpª`rpqljbop+ªTefibªqefpªfpªîplªqebª`^pbªfkªlqebo fkarpqofbpªtefèªe^sbªilkd*qbojªobi^qflkpefmpªtfqeªqebfoª`rpqljbop)ªfqªfpªbpmb`fî * ivªmolklrk`baªcloª_^khp+ Qebªqefoaªbuqbokîfqvªfpªqe^qª_^khp)ª^kaªcfk^k`fîªfkqbojbafôfbp)ªqoâbªjrè jlobª^jlkdpqªqebjpbisbpªqe^kªalªlqeboª`lomlo^qbp+ªElqbipª^kaªpqbbiªjfiipªalªklq e^sbªpfdkfcf`^kqªfkqbo*elqbiªloªfkqbo*crok^`bªjôhbqp+ªPrèªfkqbo^`qflkpª_bqtbbk _^khpª^kaªlqeboªcfk^k`fîªfkqbojbafôfbpªobi^qbªklqªlkivªqlªqebªpqo^fdeq*clo tôa fkqbo_^khªjôhbq)ª_rqªîplªqlª^kªfkòb^pfkdªo^kdbªlcªlqeboªabofs^qfsbªjôhbqp) fkslisfkdªdrô^kqbbpª%jlkl*ifkbªfkprobop&)ªòbafqªabc^riqªpt^mp)ª^pªtbiiª^pªmofjb _olhbo^dbªpbosf`bp)ªbq`+)ªbq`+ªFqªt^pª_b`^rpbªlcªqebªo^jfcf`^qflkpªlcªprèª`lkkb` * qflkpªqe^qª_lqeª?bôªPqbôkpª^kaª>FDªtbobªmolsfabaªtfqeªmr_if`ªpb`qloªprmmloq) ^ka)ªfkªmôq)ª_b`^rpbªlcªprèªo^jfcf`^qflkpªqe^qªqebªc^firobªlcªIbej^kª?olpªmolsba plªabs^pq^qfkd+4 Fkªqebªilkdboªorkªtebkªqebªarpqªe^pªpbqqiba)ª^ªc^fifkdª_^khª%ifhbª@lkqfkbkqî Fiifklfp&ª`^kªlcqbkªm^vª_^`hª^ªiôdbªmbo`bkq^dbªlcªfqpªfkqbo*_^khª_looltfkd)ª^kaªqeb kbbaªqlªobôo^kdbªabofs^qfsbª`lkqo^`qp)ªqlªtefèªqebªc^fibaª_^khªt^pª^ªmôqv )ª`^k riqfj^qbivª`ljbªlrqªìlpbªqlª^ªwbol*prjªd^jb+ª?rqªfkªqebªfjjbaf^qbª^cqboj^qeªlc qebªc^firobªlcª^kªfkqbo*`lkkb`qbaª_^kh)ªqebobªfpªjrèªrk`boq^fkqvª^_lrqªelt jrèªòbafqlopªlcªqe^qª_^khªtfiiªdbqª_^`h)ª^kaª_vªte^qªa^qb+ªQefpªtfiiªibâª^k^ * ivpqpªqlªqovªqlªj^hbªfkpq^kqª^ppbppjbkqpªlcªtelªmlqbkqfîivªpq^kapªjlpqª^qªofph)ª^ka qefpªtfiiªqebkªcbbaªafob`qivª_^`hªqlªlroªcfopqªbuqbokîfqv )ªfkcloj^qflkîª`lkq^dflk+ Qerpªqebªc^`qªqe^qª@lkqfkbkqîªFiifklfpªafaªriqfj^qbivªm^vª_^`hªqlªfqpª`loobpmlk * abkqª_^khpªlsboª6-ª`bkqpªfkªqebªaliiôªfpª klq mollcªqe^qªfqpª%^_ormqª^kaªafploaboiv& c^firobªjfdeqªklqªe^sbªqofddbobaªorkpªlkª^qªib^pqªpljbªlcªfqpª`loobpmlkabkqª_^khp+ Plªcôªtbªe^sbª_bbkª`lk`bokbaªlkivªtfqeªqebªc^firobpªlcª_^khp)ª^kaªpljbªlqebo pvpqbjf`ªfkpqfqrqflkp+ª?rqªqe^qªc^firobªfpªdbkboîivªqofddbobaª_vª^ªabìfkbªfkªqeb sîrbªlcªqebª^ppbqpªebiaª_vªqebª_^kh)ª^kaª_vª^ªorkªlkªqebª_^kh)ªfqpbicªrprîivªmof * jôfivª`^rpbaª_vª^ªmbo`bfsbaªabìfkbªfkªqebª_^khÖpª^ppbqªsîrbp+ªIfnrfafqvªmol_ibjp rprîivªdbkbo^qbªrkaboivfkdªplisbk`vªtloofbp)ª%qelrdeªqebªfiifnrfaª_^khªtfii Geneva11_latest.qxp 07/05/2009 16:48 Page 5

Analytical Background 5

^qqbjmqªqlªabkvªqefp)ª^pªfkªKloqebokªOl`h)ªqebªF`bi^kaf`ª_^khp)ªbq`+&+ªFkªloaboªql abîªtfqeªprèªifnrfafqvªmol_ibjpªmofloªqlªc^firob)ª^kaªfkªqebª`lropbªlcªifnrfa^qflk ^cqboªc^firob)ªqebª_^khªfkªafccf`riqfbpªtfiiªlcqbkª_bªclo `baªqlªpbiiª^ppbqpª%cfobªpîbp&+ ?rqªprèªpîbpªtfiiªaofsbªaltkªqebª`roobkqªjôhbqªmof`bªlcªqebªp^jbª^ppbqpªebiaªlk lqeboª_^khpÖª_llhp)ªtebkªqebpbªôbªsîrbaªlkª^ªjôh*ql*jôhbqª_^pfp+ª>ka)ªlc `lropb)ªqebªp^jbªfpªqorbªqebªlqeboªt^vªôlrka8ªplisbk`vªfpªklqªbuldbklrpªqlªifn * rfafqv+ªTebkªqebobªfpª^ªdbkboîfpbaªifnrfafqvªmol_ibjª^qqbjmqpªqlªabîªtfqeªfqªtfii ibâªqlªabìfkbpªfkª^ppbqªsîrbp)ªòb^qfkdª^ªplisbk`vªmol_ibj)ªbsbkªtebobªklkb bufpqbaª_bclob+ªFkªpeloq)ªqebobªfpª^kªfkqbokîª^jmifcvfkdªmol`bppª%ifnrfafqfvªpmfoîp& tebob_vª^ªcîifkdª^ppbqªjôhbqªibâpª_^khp)ªfksbpqjbkqªelrpbp)ªbq`+)ªqlªj^hbªjlob pîbpª%abibsbo^dfkd&)ªtefèªcroqeboªaofsbpªaltkª^ppbqªmof`bpª^kaªcfk^k`fîªfkqbo * jbafôfbpÖª^ppbppbaªmolcfqª^kaªilppª^kaª_î^k`bªpebbqªkbqªtloqe+ Tbª_bifbsbªqe^qªfqªfpªqefpªfkqbokî)ªpbic*^jmifcvfkdªavk^jf`ªqe^qªe^pªi^fkª^qªqeb ollqªlcª_lqeªqebªob`bkq)ª^kaªsfoqrîivªîiªmoflo)ªcfk^k`fîªòfpbp+ªQebªôdrjbkq^qflk ^kaª^kîvpfpªcloªqefpªì^fjªfpªpbqªlrqª^qªdob^qboªibkdqeªfkª@e^mqboª/+ªQerpªtbª_bifbsb qe^qªcfk^k`fîªòfpbpªôbªmobaljfk^kqivª`^rpbaª_vªjôhbqªavk^jf`p)ªklqªgrpqª_v buqbokîªpel`hp)ªqelrdeªprèªpel`hp)ªb+d+ªqebªaltkqrokªfkªqebªRPªelrpfkdªjôhbq fkª/--3)ªqebªnrâormifkdªlcªlfiªmof`bpªfkª.640*1)ªqebªPql`hªJôhbqª`lii^mpbªfkª.6/6) j^vªtbiiªe^sbª_bbkªqebªqofddbo+ Lkbªfjjbaf^qbªfjmif`^qflkªlcªqefpªfpªqe^qªqebªpq^kaôaªcloj^qªlcª_^khfkdªpqobpp qbpqpªfpªcrka^jbkqîivªfkprccf`fbkq+ªQebpbªpqobppªqbpqpªobsfbtªqebªbccb`qªlkªb^è _^khÖpªmolcfqpª^kaª`^mfqîªlcªpljbª%efpqlof`îiv*_^pba&ªbuldbklrpªpel`h+ª?rq)ªfc cfk^k`fîªòfpbpªôbªmofjôfivª`^rpbaª_vªbkaldbklrpªofph)ªtebob_vªqebª_^khpÖªob^` * qflkpªqlªprèª^ªqofddboªpbqpªlccª^kª^jmifcvfkdªpmfoî)ªsf^ªabìfkbpªfkª^ppbqªmof`bpª^ka obar`qflkpªfkªòbafqªbum^kpflk)ªprèªpqobppªqbpqp)ªcl`rppfkdªlkªbuldbklrpªofph)ªtfii jfppªlrqªlkªqebª%jlobªfjmloq^kq&ªpb`lka)ª^kaªefdebo )ªolrkaªbccb`qp+ª>qqbjmqpªql âgrpqªpqobppªqbpqpªcloªbkaldbklrpªofphªe^sbªklqªvbqª_lokbªjrèªcorfq+ªFqªj^vª_b qe^qªqebª_bpqªt^vªqlª^ppbppªqebªfjmif`^qflkpªlcªbkaldbklrpªofphªfpªsf^ªkbtªbkaldb* klrpª]`l*ofph*jb^probp$ªªqe^qªjb^probªqebªfkòb^pbªfkªlsboîiªofphª^cqboª`lkafqflk * fkdªlkªqebªc^`qªqe^qªlkbª_^khªfpªfkªqolr_ibª%mlppf_ivªcloªbkaldbklrpªob^plkp&+ >klqeboªt^vªqlªdlªfpªabsbilmª^ªjlabiªqlªbumilobªqebªifhbivª^`qflkp)ªob^`qflkpª^ka fkqbo^`qflkpªtfqefkªqebª_^khfkdªpvpqbj)ª_rqªqe^qªobj^fkpªiôdbivª^kªbubo `fpbªclo qebªcrqrob)ª%qelrdeªqebªm^mbopªlcªDllaeôq)ªPrkfo^kaª^kaªQ pljl`lpª%b+d+ª/--1) /--3^ª^kaª_&ªobmobpbkqª^ªpqôq&+ Qebªcfcqe)ª^kaªcfkî)ªclojªlcªbuqbokîfqvªfpª^hfkªqlªqebªclroqe+ªFkpqbâªlc)ªloª^p tbiiª^p)ªpbiifkdªcfk^k`fîª^ppbqpªqlªobd^fkªifnrfafqv )ª^kaªqlªfjmolsbª`^mfqîªo^qflp)ª^ _^kh)ªloªcfk^k`fîªfkqbojbafôv)ªj^vªpbbhªqlªobpqof`qªkbtªòbafqªbuqbkpflk)ªb+d+ª_v o^qflkfkdªsf^ªefdeboªjôdfkp,e^fo`rqpªloª_vªo^fpfkdªfkqbobpqªo^qbp)ªloªlqeboª`lpqp)ªql _looltbop+ªPrèªabibsbo^dfkd)ªsf^ªòbafqªobpqof`qflk)ªtfiiªe^sbªqebªdbkboîªbccb`qªlc iltbofkdªlrqmrqª^kaªmof`bp)ªtebqeboªlcªdllap)ªloªpbo sf`bp)ªloª^ppbqpªfkªqebªb`lkl * jv+ªQefpªtfiiªo^fpbªqebªmol_^_fifqvªlcªabc^riqªcloªîiªlqeboª_looltbop+ªQerpªqebobªfp vbqª^ªcroqeboªpbic*^jmifcvfkdªpmfoîªtebob_vªòbafqªobpqof`qflkªtb^hbkpªqebªb`lkl * jv)ªtefèªibâpªqlªjlobªabc^riqª^kaª^ppbqªmof`bªabìfkbp)ªtefèª`^rpbpªvbqªjlob òbafqªobpqof`qflkp+ Qebªfjmif`^qflkªlcªîiªqefpªfpªqe^qªqebª^mmolmof^qbªobdri^qlovª`lk`bok)ª`^rpbaª_v buqbokîfqfbp)ªifbpªtfqeªqebªfjm^`qªlcªqebªafccf`riqfbpªlcªqebªfkafsfarîªcfk^k`fî fkqbojbafôv)ªtebqeboª_vªc^firobªloªiôdb*p`îbªclo `baªabibsbo^dfkd)ªlkªqebªtfabo pvpqbj+ª>ka)ªlcª`lropb)ªjôhbqªc^firobpª%fkªqebªdrfpbªlcªobplro `bªjfpîil`^qflkp& Geneva11_latest.qxp 07/05/2009 16:48 Page 6

6 The Fundamental Principles of Financial Regulation

îplªl``roªarofkdªqebª_lljªme^pb)ªtfqeªbu`bppfsbªòbafqªbum^kpflkª^kaªfksbpq * jbkqªfkªqebªÖ_r__ibÖª^ppbqp+ªQe^qªfp)ªfkªmofk`fmib)ªpbmô^qbªcoljªqebªofphªj^k^db * jbkqªmo^`qf`bpªlcªqebªfkafsfarîª_^kh+ªQebªfkafsfarîªpjîiªabmlpfqloªfpªmolqb`qba _vªabmlpfqªfkpro^k`bª%tebobªqebªfkpro^k`bªcrkaªfkªqrokªobnrfobpª^ª jfkfjrj `^mf* qîªo^qflª^kaªmoljmqª`loob`qfsbª^`qflkª^pªp^cbdrôa&+ 5 Cloªqebªobpq)ªqebªofphfkbppªlc ^kªfkafsfarîª_^kh)ªloª^kvªlqeboªcfk^k`fîªfkqbojbafô v)ªpelriaªmolmboivªobj^fk qebªmolsfk`bªlcªqebª_^khÖpªj^k^dbop)ªltkbopª^kaªab_qªeliabop)ªpr_gb`qªqlªjôhbq afp`fmifkb)ªbu`bmq fkªplªcôª^pªqe^qªfkpqfqrqflkÖpªabjfpbªpelriaªfjmfkdbªlkªqebªtfabo pvpqbj)ªsf^ªpmfii*lsbopª^kaªbuqbokîfqfbp+ Pl)ªqebªcfopqªì^fjªlcªqefpªm^mboªfpªqe^qªobdri^qflkªe^pª_bbkªbu`bppfsbivªcl`rppba lkªpbbhfkdªqlªfjmolsbªqebª_be^sflroª^kaªofphªj^k^dbjbkqªmo^`qf`bpªlcªfkafsfarî _^khp)ªqllªjfòl*morabkqfî)ªcloªtefèªtbªtlriaª^ppboqªqe^qªfqªe^pªpifdeqªgrpqfcf`^ * qflkªfkªqebªqeblo vªlcªobdri^qflk+ª?vªqebªp^jbªqlhbkªfqªe^pª_bbkªcôªqllªifqqib cl`rppbaªlkªtfaboªpvpqbjf`ªfpprbp)ªfkprccf`fbkqivªj^òl*morabkqfî)ªtebobªfqªalbp e^sbª^ªil`rp+ª?vª`lkp`flrpivªpbbhfkdªqlªj^hbªmorabkqfîª`^mfqîªjlsbªjlobªìlpb * ivªfkª^``loaªtfqeª_^khpÖªltkªèlf`bªlcªb`lkljf`ª`^mfqî)ªobdri^qflkªafaªqllªifqqib qlªobpqo^fkª_^khªbum^kpflkªfkªqebªrmptfkd)ªkloªe^pªfqª_bbkª^_ibªqlªmolsfabª^kv prmmloqª^d^fkpqªqebª`roobkqªfjmilpflkªlcªqebªpvpqbjª^pª^ªtelib+ Ibqªrpªq^hbªqtlªhbvªbu^jmibpªlcªqebªafccbobk`bª_bqtbbkªqebªj^òlª^kaªqeb jfòlªmbopmb`qfsb+ªCfopqªibqªrpª`lkpfaboªifnrfafqv +ªFkªlkbªlcªefpªbôifboªm^mbop) Ebiitfdª%/--6&ª`lkpfabopª^ª_^khfkdªpvpqbjª`lkpfpqfkdªlcª k _^khp)ªtebobªk fpªnrfqb iôdb+ª>ªabj^kaªabmlpfqªfpªmi^`baªtfqeªqebªcfopqª_^kh)ªtefèªibkapªfqªlkªfkªqeb fkqbo_^khªjôhbqªcloªlkbªtbbhªqlª_^khª/)ªtefèªibkapªfqªlkªcloªqtlªtbbhpªqlª_^kh 0)ª^kaªplªlk)ªrkqfiªcfkîivª_^khªk dbqpª^kªfkqbo_^khªabmlpfqªclo k*.ªtbbhpª^kaªibkap fqªlkªqlª^kªbka*rpboªcloª k tbbhp+ªKlª_^khªe^pª^ªpboflrpªj^qrofqvªjfp*j^qè)ª_rq qebªpvpqbjª^pª^ªtelibªalbp+ªFqª`lriaªrko^sbiªnrfqbªnrf`hiv+ªTe^qªl``roobaªfkª/--4* 5ªt^pªgrpqªprèª^kªrko^sbiifkdªlcªtelibpîbªcfk^k`fîªjôhbqp+ªQefpªbumbofbk`b peltpªqe^qªkbfqeboªqebªpvpqbjª^pª^ªtelib)ªkloªfkafsfarîª_^khp)ªprèª^pªKloqebok Ol`h)ª`^kªmrqªqebfoªc^fqeªcloªj^fkq^fkfkdªifnrfafqvªfkª`lkqfkrba)ªrknrbpqflkba) ^``bppªqlªtelibpîbªjôhbqpªlkªob^plk^_ibªqbojp+ª Coljª^kªfkafsfarîª_^kh,jfòlªmbopmb`qfsb)ªfqªt^pªob^plk^_ibª^kaªbccf`fbkqªclo b^èª_^khªqlª^pprjbªqe^q)ªfkªklojîªqfjbp)ªqebvªtlriaªe^sbª^``bppªqlªqebªtelib * pîbªjlkbvªjôhbqp+ªLk`bªpljbª_^khpªjâbªqefpª^pprjmqflk)ª_^khpªqe^qªafaªklq alªplªtbobªmrqª^qª^ª`ljmbqfqfsbªafpâs^kq^db+ªQefpªt^pªlkbªlcªqebªclo `bpª_befka qebªab*jrqrîfp^qflkªlcª_rfiafkdªpl`fbqfbpª^kaªqebfoªbslirqflkªfkqlª_^khp)ªplªqe^q qebvª`lriaªq^mªtelibpîbªjlkbvªjôhbqp+ª>qª^ªjfòl*ibsbiªqefpªt^pªklqªsfbtbaª^p fkòb^pfkdªofph)ª_rqªobar`fkdªfqª_vªmolsfafkdªîqbok^qfsbª^kaªjlobªcibuf_ibªplro `bp lcªcrkafkd+ª?rqªqebªbumilfq^qflkªlcªjôhbqª^``bppª_vªîjlpqªîiª_^khpªfkªklojî qfjbp)ªfkòb^pbaªqebªifhbifellaªlcªafp^pqboªfkª^_klojîªqfjbp+ Qefpªqebkªo^fpbpªqebªhbvªnrbpqflkªlcªtefèªmôqfbpªpelriaªpq^kaª_befkaªqebªpvp* qbjªqlªmolsfabª^``bppªqlªifnrfafqvªfkªqebª`^pbªlcª^ªc^firobªlcªjôhbqpªqlªcrk`qflk âbnr^qbiv+ªQebobªôbªclroªmobpbkqª`^kafa^qbp+ªQebªcfopqª`^kafa^qbªfpªqebª_^khp qebjpbisbp+ªJôhbqªc^firobªjlpqªlcqbkªl``ropª%fdklofkdªmevpf`îªmol_ibjp)ªprèª^p `ljmrqboªc^firob&ª_b`^rpbªlcªòbafqª`lrkqbomôqvªofph+ªDlsbokjbkqªab_q)ªtebk abkljfk^qbaªfkªqe^qªDlsbokjbkqÖpªltkª`roobk`v )ªe^pªklªprèªofph+ª?^khpªtfqe ^jmibªnr^kqfqfbpªlcªdlsbokjbkqªm^mboª^jlkdpqªqebfoª^ppbqpª`^kªtfqepq^kaªqbjml* oôvªifnrfafqvªmol_ibjp+ª?rqªqefpªobnrfobpªqe^qª_^khpª`ôo vªiôdbªnr^kqfqfbpªlcªdls* bokjbkqªm^mboªåªmolsfafkdªibppªolljªcloªmofs^qbªibkafkdªåªloªqe^qªqebªòbafqª^ka Geneva11_latest.qxp 07/05/2009 16:48 Page 7

Analytical Background 7

ifnrfafqvªmol_ibjpªôbª`lkq^fkbaªfkªp`lmbª^kaªqfjb+6 Vbqªòbafqª^kaªifnrfafqvªmol_* ibjpªe^sbª^ªt^vªlcªorkkfkdªîlkdªcôªob^èfkdªc^riqªifkbp+ªFcªtbªôbªqlªobivªplibiv lkªqebª_^khp)ª^kaªalªklqªtfpeªqlªe^sbª^kªlsboivªobmobppbaªòbafqªpvpqbj)ªtbªtlria e^sbªqlªfkar`bª_^khpªqlª_be^sbªfkª^ªjrèªjlobª`lkpbo s^qfsb)ªofphª^sbopbªt^vªå mol_^_ivªjlobªplªqe^kªtlriaª_bª`lkpfpqbkqªtfqeª^kªfkkls^qfsb)ªavk^jf`ªb`l * kljf`ªpvpqbj+ª Pb`lka)ªqebobª`lriaª_bªmofs^qbªfkpro^k`b+ªCloªbu^jmib)ªqebªòbafqª`lrkqbo*môqv ofphªlcª^kª^ppbq)ª_lrdeqªlkªqebª_^pfpªlcªtelib*pîbªcrkafkd)ª`lriaª_bªfkprobaª_v ^klqeboªcfk^k`fîªfkqbojbafôv)ªb+d+ª^ªjlkl*ifkbªfkprobo)ªsf^ªqebª@APªjôhbq)ªbq`+ Qebªmol_ibjªtfqeªqefpªfpªqe^qªqebªlsboîiªofphªfpªklqªbifjfk^qbaª_rqªpfjmivªqo^kp * cboobaª^kaªlcqbkª`lk`bkqo^qbaªfkª%fkpro^k`b&ªfkqbojbafôfbpªtelpbªltkªmlpfqflk tlriaª_bªqeob^qbkbaª_vª^ªj^gloªpel`h+ªQebªmol_ibjpªlcª>FD)ªjlkl*ifkbpª^ka C^kkfbª^kaªCobaafbªôbª`^pbpªfkªmlfkq+ªJloblsbo )ª^pªqlrèbaªlkª^_lsb)ªofphpªqe^q ^mmbôªrk`loobi^qbaªfkªklojîªqfjbpª_b`ljbªefdeivª`loobi^qbaªfkªpqobppªpfqr^qflkp+ Fkabbaªo^qeboªqe^kªobivfkdªjlobªlkªmofs^qbªfkpro^k`b)ªqebªibpplkªlcªqebªob`bkq ò^peªfpªqe^qª_lafbpª ^ka jôhbqp qe^qªmromloqªqlªmolsfabªòbafqªfkpro^k`bªkbbaªql _bª_olrdeqªjlobªafob`qivªfkqlªqebªj^òl*morabkqfîªkbq)ª^kaªe^sbªqebfoª^_fifqvªql q^hbªlkª^kaª`lk`bkqo^qbªprèªofphªjlobªìlpbivª`lkqoliiba+ Qefoa)ªqebª@bkqoîª?^khª`lriaª_b`ljbªqebªjôhbqªj^hboªlcªi^pqªobploq)ªqlªrpb Tfiibjª?rfqboÖpª^mqªmeo^pbª%?rfqboª^kaªPf_boq)ª/--48ª?rfqbo )ª/--4&+ªTebkªjôhbqp aovªrm)ªqebª@bkqoîª?^kh)ªfkªpljbªbuqbkabaªPmb`fîªIfnrfafqvªPèbjb)ªq^hbpªqeb ^ppbqpªlccªqebªe^kapªlcªqebª_^khp+ªFcª_^khpªôbªibbo vªlcªibkafkdªqlªb^èªlqebo )ªqeb @bkqoîª?^khªfkqbomlpbpªfqpbicª^pªqebª`bkqoîªìbôfkdªelrpb)ªq^hfkdªfkªabmlpfqpªcolj promirpª_^khpª^kaªibkafkdªqlªabcf`fqª_^khp+ªQebobªfpªklqªqe^qªjrèªafccbobk`b _bqtbbkª_bfkdª^ªÖibkaboªlcªi^pqªobploqÖªfkª^ªmofjôfivª_^kh*_^pbaªpvpqbjª^kaª_bfkd ^ª]jôhbq*j^hboªlcªi^pqªobploqÖªfkª^ªmobaljfk^kqivª`^mfqîªjôhbqªpvpqbj+ª?lqeªôb pr_gb`qªqlªqebªp^jbªhfkaªlcªÖorkpÖ)ªqe^qª`îiªcloªlccf`fîªfkqbosbkqflk+ªLcª`lropb)ªqeb @bkqoîª?^khªjfdeqªprccboªpljbªilpp)ªfcª`lkafqflkpª_b`ljbªobîivªafob)ª_rqªtfqeªqeb Dlsbokjbkqª^kaªQob^provª_befkaªfq)ªfqª`^kªît^vpª_bªob`^mfqîfpba+.- >ªdob^qboª`lk* `bokªqe^kªilppª%tbª_bifbsb&ªfpªjloîªe^wôa+ªPelriaªqebª@bkqoîª?^khªpqbmªfkª^p jôhbqªj^hboªlcªi^pqªobploqª^qªqebªcfopqªtefccªlcªafccf`riqv )ªtlriaªqe^qªklqªibâªqeb _^khp)ª^kaªlqeboªcfk^k`fîªfkqbojbafôfbp)ªqlªq^hbªlkªjrèªjlobªofphªfkªklojî qfjbpªfkªqebª_bifbcªqe^qªqebvª`lriaªrkilâªfqªlkªqebª@bkqoîª?^khªfkª_âªqfjbp< Qebªclroqeªlcªlroª`^kafa^qbpªfpªqebªDlsbokjbkqª%Qob^prov&ªtefèª`lriaªmolsfab mr_if`ªpb`qloªfkpro^k`bª^d^fkpqªòbafqª`lrkqbo*môqvªofph+ªQefpªe^pªkltª_bbkªalkb lkª^ªtfabªp`îb)ª^kaªt^pªqebªbppbk`bªlcªqebªHlqifhlcc,Jbeoifkd,Jfikbª%/--5&ªmol * mlpîªqe^qªqebªdlsbokjbkqªdrô^kqbbpªqebªefdebpqªdoâbªjloqd^db*_^pbaªpb`rofqfbp ^d^fkpqªprèªofph)ªqebob_vªqo^kpclojfkdªqebjªbccb`qfsbivªfkqlªmr_if`ªpb`qloªab_q+ Qebªnrbpqflkpªqebkªl_sflrpivªôfpbªlkªte^qªqbojpª^kaªlkªte^qªl``^pflkpªqebªmr_* if`ªpb`qloªpelriaªmolsfabªprèªfkpro^k`b)ª^kaªqebªmofloªfpprbªlcªjloîªe^wôa ob`rop+ Pl)ªqebobªôbªclroªmlqbkqfîªplro `bpªlcªmolqb`qfkdªqebªcfk^k`fîªpvpqbjª^d^fkpq qebªc^firobªlcªtelibpîbªcfk^k`fîªjôhbqpª^ka)ªebk`b)ªlcªfiifnrfafqv +ªQebpbªôb7ª%.& qebª_^khp)ª^kaªqebªlqeboªcfk^k`fîªfkpqfqrqflkp)ªqebjpbisbp8ª%/&ªmofs^qbªfkpro^k`bª8 %0&ªqebª@bkqoîª?^kh8ª%1&ªmr_if`ªfkpro^k`b+ªQebªnrbpqflkªqlª_bªabqbojfkbaªfpªte^q tbfdeqªpelriaª_bªmi^`baªlkªb^è+ Fkªâafqflkªqlªqebª`^pbªlcªifnrfafqv)ª^ªpb`lkaªbu^jmibªlcªqebªafccbobk`bª_bqtbbk j^òlª^kaªjfòlªmorabkqfîª_be^sflroªobi^qbpªqlª`^mfqîªâbnr^`v+ªFkabbaªlkbªob^* Geneva11_latest.qxp 07/05/2009 16:48 Page 8

8 The Fundamental Principles of Financial Regulation

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Figure 1 The Relationship between Credit Ratings and Capital Adequacy Requirements CAR

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Analytical Background 9

Qebpbªqtlªolibpªôbªlcqbkªnrfqbªafppfjfiô +ªQebªjfòl*morabkqfîª`lk`bokªfp ^_lrqªfkafsfarîªofph8ªqebªj^òl*morabkqfîªtfqeª`ljjlk)ªeboaª_be^sflro )ª^ka tfqeªpefcqpªfkªdbkboîfpbaª^qqfqrabpªqlªofph+ªFkafsfarîªfkpqfqrqflkîªofphª`^kªlcqbk _bªpbbkªqlª_bªilt)ªloªcîifkd)ª^pªfkª/--1*3)ªtebkª`ljjlkªj^òl*morabkqfîªofphªfp ofpfkdª%^kaªsf`bªsbop^)ª^pªfkª.66/*0&+ªPfjfiôiv )ªjfòl*morabkqfîªofphªfpª`lk`bokba ^_lrqªofphª`lk`bkqo^qflkªtfqefkªfkafsfarîªfkpqfqrqflkp8ªj^òl*morabkqfî*mor * abkqfîªofphªobi^qbpªjlobªqlªpfjfiôªmloqcliflªeliafkdpª^jlkdpqªfkpqfqrqflkpªfkªqeb pvpqbj+ªFkabbaªfcªîiªqebªfkafsfarîªfkpqfqrqflkpªpelriaª_bª`lk`bkqo^qbaªb^èªfk afppfjfiôªmloqcliflpª%afsbopfcfbaªfkqlªpfjfiôªmloqcliflp&)ªqebªjfòlªofphªtlriaª_b efde)ª_rqªqebªj^òlªofphªiltª%sf`bªsbop^ªtfqeªiltªjfòl)ª_rqªefdeªj^òlªofph&+ª>ii qefpªfpªpbqªlrqªfkªdob^qboªabq^fiªfkª@e^mqbopª/ª^kaª0+ Tebob^pªtbªalªì^fjªqe^qªklqªbklrdeª^qqbkqflkªe^pª_bbkªdfsbkªqlªj^òl*mor * abkqfîªofphªîibsf^qflk)ªqefpªfpª klq qlªprddbpqªqe^qªqebªmobpbkqªjfòl*morabkqfî jb^probpªôbªrkkb`bppô vªloªtolkdivªabpfdkbaª%qelrdeªqebvª`^kª_bªfjmolsba&) _rqªgrpqªfkprccf`fbkqªlkªqebfoªltk+ªFkabbaªtebobª^kªfkpqfqrqflk)ªloªjôhbq)ªfpªprc * cf`fbkqivªiôdbªloªpqo^qbdf`)ªplªqe^qªfqpªc^firobª_vªfqpbicªtlriaª`^rpbªbuqbokîfqfbp) qebkªfqªalbpªkbbaªfkafsfarîiv*qôdbqbaªjfòl*morabkqfîª`lkqolip8ªfkªqebª`^pbªlc _^khpªqefpªtlriaª_bªqebª?^pbiªFFªofph*tbfdeqbaª@>Op+ªLroªmlfkqªfpªo^qeboªqe^qªqeb jfòl*morabkqfîªobdri^qflkpªôbªklqªprccf`fbkqª_vªqebjpbisbp+ªQebvªkbbaªqlª_b prmmibjbkqbaª_vªj^òl*morabkqfîª`lkqolip+ªT bªmolmlpbªîqbok^qfsbªjb^probp tebob_vªqebª?^pbiªFFªofph*tbfdeqbaª@>Oªfpªfkqbo^`qbaªtfqeªj^òl*morabkqfîªjb^p* robpªqlª^èfbsbª^ª`lrkqbo*`vìf`îªlsboîiªbccb`qª^kaªqlªmbkîfpbªpvpqbjf`îivªa^k * dbolrpªcrkafkdªjfpj^qèbp+ªQefpªfpprb)ª^kaªqebªabpfdkªlcªprèª`lrkqbo*`vìf`î jb^probp)ªfpªq^hbkªrmªfkª@e^mqboª1+ Fkªmofk`fmib)ªqebobªôbªlqeboªolrqbpªtebob_vªobdri^qlopª`^kªpbbhªqlªj^hbª_^khp) ^kaªlqeboªobibs^kqªcfk^k`fîªfkqbojbafôfbp)ªfkqbokîfpbªqebªkbd^qfsbªbuqbokîfqfbp qe^qªtbªe^sbªlrqifkba+ªª?bpfabpª`^mfqîªèôdbp)ªlkbª`lriaªpbqª^ªMfdlsf^kªqûªlk qe^qª^`qfsfqv)ªloªqovªqlªmolsfabªfkpro^k`bª^d^fkpqª`lkq^dflrpªòfpbp)ªbfqeboªlmbo^qba tfqefkªqebªmofs^qbªpb`qlo)ªqebªmr_if`ªpb`qlo)ªloªpljbª`lj_fk^qflkªlcª_lqe+ªªFkªmo^`* qf`bª_^khpªtfiiªob`hlkªqe^qª_bfkdªclo `baªqlªeliaªâafqflkîª`^mfqî)ª`lrkqbo*`vìf * `îiv)ªfpª^ªclojªlcªqû^qflk)ªtebkªfqª_fqbp8ª^kaª`^mfqîªèôdbpªe^sbªqebªâafqflkî âs^kq^dbªlcªmolsfafkdªmolqb`qflkªqlªlqeboªpq^hb*eliabop)ªfkìrafkdªqûm^vbop+ Tbªafpjfppªqebªmlppf_fifqvªlcªmrobivªmofs^qbªpb`qloªfkpro^k`b)ªpfk`bªqefpªtlria grpqªibâªqlªqebªkbbaªcloªqebªdlsbokjbkqªqlªmolqb`qªqebªfkprobopª%b+d+ª>FD&+ªªQebob e^sb)ªeltbsbo)ª_bbkª^ªkrj_boªlcªmolmlpîpªcloªpljbªjfuqrobªlcªmr_if`ª^kaªmof * s^qbªfkpro^k`b)ªrprîivªlkªqebªdolrkapªqe^qªqebªmof`fkdªlcªprèªfkpro^k`bªtlria _bª_bqqboªalkbª_vªqebªmofs^qbªpb`qlo8ªpljbªlcªqebpb)ª%b+d+ª@e^mqboª.0)ª_vª>èô v^) Mefifmmlkª^kaªOfèôaplkªfkª>èô v^ª^kaªOfèôaplkª%/--6&&)ªe^sbªlsbo `ljb pljbªlcªqebªj^fkªeroaibpªqlªprèª^kªbubo `fpb+ªªKbsboqebibpp)ªtfqelrqªtfpefkdªql buìrabªcroqeboª`lkpfabo^qflkªlcªprèªîqbok^qfsbªfab^p)ªtbªpeîiªmofjôfivªcl`rpªlk `^mfqîªâbnr^`vªobnrfobjbkqp+ªªFkª^ªpbkpbªefdeboª`^mfqîªèôdbpªcloªpvpqbjf` cfk^k`fîªfkpqfqrqflkpª`^kª_bªpbbkª^pª^ªclojªlcªmr_if`ªpb`qloªfkpro^k`bªmobjfrj+ Qebª`roobkqª?^pbiªFFªobnrfobjbkqpªcloª`^mfqîªâbnr^`vªôbªmol*`vìf`î8ª^pªo^q * fkdpªjfdo^qbªaltktôapªfkª^ª_rpq)ª@>Opªofpb)ª^qª^ªqfjbªtebkªmolcfqpªcîi)ªtofqb*lccp fkòb^pbª^kaª`^mfqîªjôhbqpªôbªrktbi`ljfkdªqlªâafqflkîªfpprbpªlcªbnrfqv)ª^pªbsf* abk`baªob`bkqivª%qelrdeªqebªsîrbªlcªkbtª`^mfqîªo^fpbaªbu`bbabaªlroªfkfqfîªcbôp&+ Te^qªeâªklqª_bbkªprccf`fbkqivª^mmob`f^qbaª_bclobe^kaªt^pªqebªbuqbkqªlcªfkqbo^` * qflkª_bqtbbkªqebªmol*`vìf`îfqvªlcªqebª@>Opª^kaªlcªqebªbjbodfkdªjôh*ql*jôhbq) Geneva11_latest.qxp 07/05/2009 16:48 Page 10

10 The Fundamental Principles of Financial Regulation

c^foªsîrb)ª^``lrkqfkdªpvpqbj)ªFCOP)ªbpmb`fîivªFCPª06)ª^kaªC>P?)ªbpmb`fîivªC>Pª.24+ Qe^qªfkqbo^`qflkªfpªkltªtbiiªrkabopqllaª^kaªrkaboªqebªRPªBjbodbk`vªB`lkljf` >`qªlcªL`ql_boª/--5)ª^ª`ljjfppflkªfkªqebªRP>ªtfiiªpqravªqebªtfaboªcfk^k`fî fjmif`^qflkpªlcªrpfkdªjôh*ql*jôhbqªcloªqebªcfk^k`fîªpvpqbj)ªtebqeboªfqpªrpb pelriaª_bª^jbkaba)ª^ka)ªfcªpl)ªelt+ Tbªôbªklqªfkª^ªmlpfqflkªqlªpb`lka*drbppªqebªlrq`ljbªlcªqe^qªpqrav )ª^ka ^``lrkqfkdªmo^`qf`bpªôbªklqªlroª`bkqoîªcl`rp)ªqelrdeªtbªalªpbbªmol_ibjpªfkªjls* fkdªqlª^kvªîqbok^qfsbªmol`barob+.0 Qebªmlfkqªqe^qªtbªalªt^kqªqlªbjme^pfwbªfpªqe^q qebªibppªqe^qª`^kª_bªalkbªqlªibppbkªqebªmol*`vìf`îfqvªlcªÖjôh*ql*jôhbqÖ)ªqebªjlob rodbkqªfqª_b`ljbpªqlªmrqªdob^qboªtbfdeqªlkªptfqèfkdªqebªbccb`qpªlcªj^òl*mor * abkqfîªobdri^qflkªcoljª_bfkdªmol*`vìf`îªqlª_b`ljfkdª`lrkqbo*`vìf`î+ªT bªîpl molmlpbª^ªjôh*ql*crkafkdªco^jbtlohªqe^qª%f&ªobar`bpªmol`vìf`îfqvª^kaª%ff&ªmol * sfabpªfk`bkqfsbpªqlªobar`bªj^qrofqv*jfpj^qè+ªKbsboqebibppªtbªpeîiªj^hbªpljb croqeboª_ofbcª`ljjbkqpªlkªqefpªqlmf`ªfkª@e^mqboª2+ªtbªpeîiªîplªabîªqebob)ª^kaª^q o^qeboªdob^qboªibkdqe)ªtfqeªqtlªlqeboª`roobkqªfpprbp)ª_^khbopÖªobjrkbo^qflkª^ka ifjfqpªlkªil^kªqlªsîrbª%^ka,loªil^kªqlªfk`ljb&ªo^qflp)ªmirpª^ªcbtªtloapªlkªlqebo obi^qbaªqlmf`p+ >ªèfbcªòfqf`fpjªlcªqebª`roobkqªpvpqbjªlcª@>Op)ª?^pbiªFªpefcqfkdªlsboªqlª?^pbiªFF) e^pª_bbkªqe^qªfqª^mmbôbaªqlªalªqllªifqqibªqlªifjfqª_^khbopÖªòbafqªbum^kpflkªfkªqeb _llj)ªkloªqlªebimªlccpbqªqebªt^sbªlcªm^kf`)ªc^firobpª^kaªabibsbo^dfkdªfkªqebªpr_ * pbnrbkqªòfpfp+ª@>Opªkbsboªpbbjbaªqlª_fqb)ª^kaªcfk^k`fbopªpbbjbaªqlª_bª^_ibªqlªal ^pªqebvªmib^pba)ª^fabaª_vªjrèªobdri^qlo vªô_fqo^dbªsf^ªqebªpeâltª_^khfkdªpvp * qbjª^kaªabofs^qfsbªjôhbqp)ªb+d+ªebadfkdª`lrkqbo*môqvªofphªsf^ª@AP+ª >kªbccb`qfsbª`lrkqbo*`vìf`îªj^òl*morabkqfîªmlif`vªtfiiª_bª^kªrkmlmriôªmli* f`v)ªpfk`bªfqpªmromlpbªfpªqlª`lkpqo^fkªqebªobdri^qbaªcoljªalfkdªte^qªqebvªt^kqªql alªtebkªqebvªt^kq)ª_vªibdîªmolef_fqflkªloª_vªj^hfkdªfqªjrèªjlobªbumbkpfsb+ Qebobªfpª^ªk^qroîªfk`bkqfsbªqlª^slfaªqebªobdri^qflkªsf^ª^ªpefcqªlcª_rpfkbppªfkqlªqeb rkobdri^qbaªpb`qlo+ªTbªabpòf_bªqefpª^pªqebªÖ_lrkaôvªmol_ibjÖ)ªtefèªfpªabpòf_ba fkªjlobªabq^fiªfkª>mmbkafuª>)ªiôdbivª^ªobmofpbªlcªDllaeôqª%/--5&+ªQebobªôbªqtl ^pmb`qpªlcªqebª_lrkaôvªmol_ibj8ªqebªpefcqªlcª^`qfsfqvªqlªrkobdri^qbaªmi^vbop8ª^ka qebªrpbªlcªcfk^k`fîªbkdfkbbofkdªqlªbk^_ibªdfsbkª`^mfqîªqlªprmmloqªjlobªòbafq+ ?lqeªôbªfjmloq^kq+ªFkªqebªi^pqª_lljªqebªrpbªlcªlcc*_î^k`b*pebbqªbkqfqfbpªt^p ôdr^_ivª^p)ªloªjlob)ªpboflrpª^pªqebªpefcqªqlªrkobdri^qbaªfkpqfqrqflkp+ Qebªj^fkªmlfkqªfpªqe^qªqebªÖ_lrkaôvªmol_ibjÖªfpªplªmbos^pfsbªqe^qªbfqeboªcfk^k* `fîªobdri^qflkªe^pªqlª_bªc^foivªifdeq*qlrè)ªplª^pªqlª^slfaªj^ppfsbª^slfa^k`bªsf^ afpfkqbojbaf^qflk)ªloªqlª_bªobpqof`qfsbª^kaªmobpòfmqfsbªfkªqebªpbkpbªlcªmobsbkqfkd afpfkqbojbaf^qflkªsf^ªibdîªmolef_fqflk+ªLroªmobcbobk`bªfpªcloªifdeq*qlrèªobdri^ * qflk)ª%tfqeªlkbªbu`bmqflkªlkªelrpfkdªil^k*ql*sîrbªo^qflp)ªqlª_bªafp`rppbaªi^qboªfk @e^mqboª3&+ªFkªdbkboî)ªobpqof`qfsbª`lkqoliªlcªcfk^k`fîªfkqbojbaf^qflkªpqfcibpªfkkl * s^qflkª^ka)ªbpmb`fîivªfcªdlsbokjbkqªpqôqpªqlªfkqbo sbkbªtfqeªafob`qª`lkqolipªlsbo _^khªibkafkd)ªfkqbocbobpªtfqeªqebª^mmolmof^qbªîil`^qflkªlcª`^mfqî+ Qefpªmlpbpªnrfqbª^ªmol_ibj+ªEltªalªvlrªj^hbªobdri^qflkª`lrkqbo*`vìf`î)ªbccb`* qfsbª%^kaªebk`bªrkmlmriô&)ª^kaªvbqª^qªqebªp^jbªqfjbªobi^qfsbivªifdeqªqlrè<ªQefp fpªklqªb^pv8ªfkabbaªfcªqebªplirqflkªt^pªb^pv )ªfqªtlriaªe^sbª_bbkªafp`lsbobaª^ka ^mmifbaªilkdª^dl+ªTbª_bifbsbªqe^qªlroªmolmlpîp)ªq^hbkª^pª^ªtelib)ªtlriaªebimªql obplisbªqefpªafibjj^+ Qebobªfp)ªfkabba)ª^ªa^kdboªqe^q)ªfkªqebª^cqboj^qeªlcªqebª`roobkqªòfpfp)ª`^mfqî obnrfobjbkqpªtfiiª_bªo^qèbqbaªrmtôap)ªklqªlkivªarofkdª_lljªmboflap)ª^pªâsl * Geneva11_latest.qxp 07/05/2009 16:48 Page 11

Analytical Background 11

`^qbaªebob)ª_rqªqeolrdelrq+ªªQe^qªtfiiªiltboª`^mfqîªobqrokpªfkª_^khfkdª^kaªlqebo bnrfsîbkqivªobdri^qbaªpb`qlop+ªªQebªobdri^qbaªpb`qloªtlriaªqebkªpeofkh)ªobi^qfsbªql rkobdri^qbaªfkqbojbafôfbpª^kaªjôhbqp)ª^ka,loªqebª_^khpªtlriaªq^hbªlkªjlob ofphªqlªj^fkq^fkªefdeboªOlBp+ªªBfqeboªt^vªfkqorpfsbªobdri^qflkªfpªifhbivªqlª`^rpb _be^sflroîªè^kdbpªqe^qª`lriaªrpeboªfkªqebªkbuqªòfpfp)ªfkªp^vª/-ªvbôpªqfjb+ Obdri^qlop)ª^kaªmlifqf`f^kp)ªpfjmivªe^sbªqlª_bª^tôbª^kaªîboqªqlªprèª^kªfkbsfq^_ib obdri^qlovªafîb`qf`)ª^kaªqovªqlª^slfaªbu^`bo_^qfkdªfq+ªªQe^qªfpªklqªplªb^pv)ªbpmb`fîiv tebkªqebª`roobkqªqrojlfiªfpªplª^`rqbª^kaªcobpeªfkªlroªjbjlo v+ >ªpb`lkaªòfqf`fpjªlcªqebª?^pbiª^mmol^èªqlª@>Opªfpªqe^qªqebvªafaªklqªalªprè abq^fibaªqefkhfkdª^_lrqªfk`bkqfsbpª^kaªp^k`qflkp+ªFkpqbâ)ªqebvªpfjmivªprddbpqba mobcboobaªclojpªlcª%_^kh&ª_be^sflro +ªQerpªqebvª`^jbªlrqªtfqeªmolmlpbaª`^mfqî o^qflp)ªtefèªqebkª_b`^jbªqo^kpi^qbaªfkqlªofdfaªjfkfj^+ª?rqªprèªjfkfj^ª_b`^jb fkªmo^`qf`bªrk^s^fi^_ibª^qªqfjbpªlcªkbba+ªCloªbu^jmibª_^khpª`roobkqivª`^kklqªîilt qebfoªmr_ifpebaªqfboª.ª`^mfqîªqlªcîiª_biltª1")ªabpmfqbªlkbªlcªqebªdob^qbpqªrkbu * mb`qbaªpel`hpªlcªîiªqfjb+ªFkªc^`q)ªklªpfdkfcf`^kqª_^khªtlriaªkltªaôbªqlªîiltªfqp o^qflªaolmªjrèª_biltª^_lrqª4*5")ª_b`^rpbªqebªjôhbqªmrkfpebpª_^khpªbsbkªjlob bccb`qfsbivªqe^kªprmbosfplop+ªCôªcoljªâafkdªqlªqebªobpfifbk`bªlcªqebª_^khfkdªpvp * qbj)ªprèªobnrfobaªjfkfj^ªgrpqªobmobpbkqª^ª_roabk)ª^kaªj^vªbsbkªfkabbaªbu^`bo * _^qbªofph*q^hfkdª_vªj^hfkdªfqªeôaboªcloª_^khbopªqlªl_q^fkªqebfoªqôdbqªobqrokªlk ^ppbqpª%OL>&+ªFkpqbâªte^qªfpªbppbkqfîªfpªqlªabsfpbª^ª`îf_o^qbaªiâaboªlcªfkòb^pfkd mbkîqv)ª^pªqebª@>Oªcîipª_biltªqebªÖtbiiª`^mfqîfpbaÖªibsbi8ª^d^fkªqefpªiôdbiv fkslisbpªcliiltfkdªqebªibâªlcªqebª^rqelopªlcªqebªCbaboîªAbmlpfqªFkpro^k`b @lomlo^qflkªFjmolsbjbkqª>`qª%CAF@F>&ªlcª.66.+ Geneva11_latest.qxp 07/05/2009 16:48 Page 12 Geneva11_latest.qxp 07/05/2009 16:48 Page 13

2 Nature of Systemic Risk

?bclobª`lkpfabofkdªqebªabq^fipªlcªcrqrobªobdri^qflk)ªfqªfpªabpfo^_ibªqlªe^sbª^ªdlla rkabopq^kafkdª^_lrqªqebª`^rpbpªlcªifnrfafqvª^kaªplisbk`vªmol_ibjp+ªFcª^ªcfk^k`fî fkpqfqrqflkªfpªfkplisbkq)ªfqªpelriaª_bªìlpbaªaltkª%qelrdeªklqªkb`bppôfivªifnrf * a^qba&+ªEltbsbo)ªfcªqebªcfk^k`fîªmol_ibjpªpqbjªmofjôfivªcoljªqbjmloô vªifnrfa* fqvªmol_ibjp)ªqebkªfkqbosbkqflkªjfdeqª_bªgrpqfcfbaªqlªp^sbªqebªcfk^k`fîªfkpqfqrqflk+ Fkªqefpª@e^mqboªtbªlrqifkbªeltªifnrfafqvªmol_ibjpª`^kªibâªqlªplisbk`vªmol_ibjp ^kaªeltªobi^qfsbivªpjîiªpel`hpª`^kª`^rpbªifnrfafqvªpraabkivªqlªao vªrmª)ª`ôovfkd qebªmlqbkqfîªcloª^ªcrii*_iltkªcfk^k`fîªòfpfp+ªT bªcfopqªillhª^qªqebªmol_ibjpªcolj ^kªfkafsfarîªcfk^k`fîªfkpqfqrqflkÖpªmbopmb`qfsb)ª^kaªqebkªefdeifdeqªqebªfjmlo * q^k`bªlcªillhfkdª^qªfqªcoljª^ªpvpqbjf`ª`lkqbuq+ª>pªtbªlrqifkbªpbsboîª^jmifcf`^qflk jbè^kfpjp)ªfqªtfiiª_b`ljbª^mmôbkqªqe^qªqebª`roobkqªmefilplmevªlcª_^khfkdªobd* ri^qflkªåªqe^qªvlrª`^kªj^hbªqebªpvpqbjªp^cbª_vªj^hfkdªfkafsfarîªfkpqfqrqflkpªp^cb åªfpª^kªrkp^qfpc^`qlovª_^pfpªcloªfkprofkdªqebªpq^_fifqvªlcªqebªpvpqbjª^pª^ªtelib+

2.1. Solvency, Liquidity and Maturity Mismatch

>ªcfk^k`fîªfkpqfqrqflkªfpªfkplisbkqªtebkªfqpª]dlfkdª`lk`bok$ªsîrbªalbpªklqªbu`bba qebªbumb`qbaªsîrbªlcªfqpªif^_fifqfbp+ªFkªklojîªqfjbp)ªtebkªcfk^k`fîªjôhbqpªôb pqolkd)ªfqªfpªc^foivªb^pvªqlªfabkqfcvªfkplisbkqªcfk^k`fîªcfojp+ªEltbsbo )ª^qªqfjbpªlc òfpfp)ªfqªfpªafccf`riqªpfk`bªplisbk`vª_b`ljbpªplª`l*jfkdibaªtfqeªifnrfafqvªfpprbp+ Mof`bpªlcª^ppbqpª_b`ljbªafp`lkkb`qbaªcoljªbpqfj^qbpªlcªbumb`qbaª`^peªciltpª^ka) fkpqbâ)ªobcib`qªqebªmof`bpªqe^qª`lriaª_bªl_q^fkbaªfcªqebª^ppbqpªeâªqlª_bªpliaªqljlo* oltªqlªqebªcbtªfksbpqlopªmobmôbaªqlª_rvªprèª^ppbqpª^qªprèªqfjbª%qebªifnrfafqv mof`b&+.1 Qebªjbè^kfpjpªqe^qªbumi^fkªtevªifnrfafqvª`^kªpraabkivªbs^mlo^qbªlmbo^qb qeolrdeªqebªfkqbo^`qflkªlcªcrkafkdªfiifnrfafqvªarbªqlªj^qrofqvªjfpj^qèbpª^ka jôhbqªfiifnrfafqv+ >pªilkdª^pª^ªcfk^k`fîªfkpqfqrqflkÖpª^ppbqpªm^vªlccªtebkbsboªfqpªab_qªfpªarb)ªfqª`^k* klqªprccboªcoljªcrkafkdªifnrfafqvªmol_ibjpªbsbkªfcªfqªfpªefdeivªibsboba+ªEltbsbo ) cfk^k`fîªfkpqfqrqflkpªqvmf`îivªe^sbª^kª^ppbq*if^_fifqvªj^qrofqvªjfpj^qèª^ka ebk`bªôbªbumlpbaªqlªcrkafkdªifnrfafqvªofph+ª>ªcrkafkdªpeloq^dbªôfpbpªtebkªfqªfp molef_fqfsbivªbumbkpfsbª_lqeªqlª%f&ª_looltªjlobªcrkapª%iltªcrkafkdªifnrfafqv&ª^ka %ff&ªpbiiªlccªfqpª^ppbqpª%iltªjôhbqªifnrfafqv&+ªFkªpeloq)ªmol_ibjpªlkivªôfpbªfcª_lqe crkafkdªifnrfafqvªaofbpªrmª%efdeªjôdfkp,e^fo`rqp)ªobpqo^fkbaªibkafkd&ª^kaªjôhbq ifnrfafqvªbs^mlo^qbpª%cfobªpîbªafp`lrkqp&+ª

13 Geneva11_latest.qxp 07/05/2009 16:48 Page 14

14 The Fundamental Principles of Financial Regulation

Jlobªpmb`fcf`îiv)ªcrkafkd ifnrfafqv abpòf_bpªqebªb^pbªtfqeªtefèªfksbpqlopª^ka ô_fqo^dbropª`^kªl_q^fkªcrkafkdªcoljªcfk^k`fbop+ªCrkafkdªifnrfafqvªfpªefde*^ka jôhbqpªôbªp^faªqlª_bª]^t^peªtfqeªifnrfafqv$*tebkªfqªfpªb^pvªqlªo^fpbªjlkbv + Qvmf`îiv)ªtebkª^ªibsbo^dbaªqoâbo )ªprèª^pª^ª_^kh)ªabîbo )ªloªebadbªcrka)ªmro * è^pbpª^kª^ppbq)ªebªrpbpªqebªmroè^pbaª^ppbqª^pª`lii^qboîª^kaª_looltpª%peloq*qboj& ^d^fkpqªfq+ªEltbsbo)ªebª`^kklqª_looltªqebªbkqfobªmof`b+ªQebªafccbobk`bª_bqtbbkªqeb pb`rofqvÖpªmof`bª^kaªfqpªsîrbª^pª`lii^qboî*qebªjôdfkªloªe^fo`rqªåªjrpqª_bªcfk^k`ba _vªqebªqoâboÖpªltkªbnrfqvª`^mfqî+ªJôdfkªibkafkdªfpªpeloq*qbojªpfk`bªjôdfkpª^ka e^fo`rqpª`^kª_bªâ^mqbaªqlªjôhbqª`lkafqflkpªlkª^ªa^fivª_^pfp+ Cfk^k`fîªfkpqfqrqflkpªqe^qªobivªpr_pq^kqfîivªlkªpeloq*qbojª%`ljjbo `fî&ªm^mbo loªobmlª`lkqo^`qpªe^sbªqlªoliiªlsboªqebfoªab_q+ª>kªfk^_fifqvªqlªoliiªlsboªqefpªab_q*fc) cloªbu^jmib)ªqebªjôhbqªcloª`ljjbo `fîªm^mboªaofbpªrm*fpªbnrfsîbkqªqlªjô * dfkp,e^fo`rqpªfkòb^pfkdªqlª.--ªmbo `bkq)ª_b`^rpbªqebªcfojª_b`ljbpªrk^_ibªqlªrpb fqpª^ppbqpª^pª^ª_^pfpªcloªo^fpfkdªcrkap+ªPfjfiôiv)ªtfqeao^tîpªlcªabj^kaªabmlpfqpªlo `^mfqîªobabjmqflkpªcoljª^kªfksbpqjbkqªcrkaªe^sbªqebªp^jbªbccb`qª^pª^kªfkòb^pb fkªjôdfkp+ªCrkafkdªifnrfafqvªofphªfpªarbªqlªj^qrofqvªjfpj^qèbpª^kaª`^kªqerpªq^hb qeobbªclojp7ª.&ªjôdfk,e^fo`rqªcrkafkdªofph)ªloªqebªofphªqe^qªjôdfkpª^kaªe^fo `rqp tfiiªè^kdb8ª/&ªoliilsboªofph)ªloªqebªofphªqe^qªfqªtfiiª_bªjlobª`lpqivªloªfjmlppf_ibªql oliiªlsboªpeloq*qbojª_looltfkd8ª^kaª0&ªobabjmqflkªofph)ªloªqebªofphªqe^qªabj^ka abmlpfqlopªlcª_^khpªloªbsbkªbnrfqvªeliabopªpbbhªqlªtfqeao^tªcrkap+ª>iiªqeobbªfk`ô* k^qflkpªlcªcrkafkdªifnrfafqvªofphªôbªlkivªabqofjbkqîªtebkª^ppbqpªjrpqª_bªplia lkivª^qªcfob*pîbªmof`bp*qe^qªfp)ªtebkªjôhbqªifnrfafqvªfpªilt + Jôhbq ifnrfafqv fpªiltªtebkªfqªfpªafccf`riqªqlªo^fpbªjlkbvª_vªpbiifkdªqebª^ppbqª^q ob^plk^_ibªmof`bp+ªFkªlqeboªtloap)ªjôhbqªifnrfafqvªfpªiltªtebkªpbiifkdªqebª^ppbq abmobppbpªqebªpîbªmof`b+ªTebkªjôhbqªifnrfafqvªfpªilt )ªfqªfpªsbovª`lpqivªqlªpeofkhª^ cfojÖpª_î^k`bªpebbq+ª Qebpbªqtlªifnrfafqvª`lk`bmqpªalªklqªbufpqªfkª^ªs^`rrj8ªqebvªôbªfkcirbk`baª_v qebªcfk^k`fîªplrkakbppªlcªlqeboªcfk^k`fîªfkpqfqrqflkp+ Qoâfqflkîiv)ª`^mfqîªobnrfobjbkqpªe^sbª_bbkªqebª`lokbopqlkbªlcªcfk^k`fîªobd * ri^qflkªåªbpmb`fîivªplªcloª_^khp+ªQebª`roobkqªqefkhfkdª_befkaªqebªrpbªlcª`^mfqî obnrfobjbkqpªfpªqe^qªj^fkq^fkfkdª^ª`^mfqîª_rccboªîiltpª^kªfkpqfqrqflkªqlª^_plo_ ilppbpªlkªfqpª^ppbqpª^kaªobj^fkªplisbkq)ªqebob_vªmolqb`qfkdªfqpªòbafqlopªåªklq^_iv obq^fiªabmlpfqlop+ªJloblsbo)ªqe^qªqefkhfkdªobifbpªlkªqebªob^plkfkdªqe^qªqebªplisbk * `vªlcªb^èªfkafsfarîªfkpqfqrqflkªbkprobpªqebªplrkakbppªlcªqebªcfk^k`fîªpvpqbjª^p ^ªtelib+ªQefpªqefkhfkdªibâpªk^qroîivªqlªqebª`lkìrpflkªqe^qªqebªhbvªabqbojfk^kq lcªqebªpfwbªlcªqebªobdri^qlovª`^mfqîª_rccboªpelriaª_bªpljbªjb^probªlcªofphpª^ppl`f * ^qbaªtfqeªqebª^ppbqpªlcªqe^qªfkpqfqrqflk+ªQefpªfpª_b`^rpbªqebªabdobbªqlªtefèªpli * sbk`vª`^kª_bªbkprobaªabmbkapªlkªqebªifhbifellaªqe^qªqebªobîfwbaªsîrbªlcª^ppbqp cîipª_biltªqebªklqflkîªsîrbªlcªqebªòbafqlopÖªì^fj+ªQebªlofdfkîª?^pbiª`^mfqî ^``loaªlcª.655ªfkqolar`baª`lôpbªofphª_r`hbqpªfkqlªtefèª^ppbqpª`lriaª_bªì^ppfcfba) _rqªqebª?^pbiªFFªoribpªe^sbªq^hbkªqebªfab^ªjrèªcroqebo)ª_vªobcfkfkdªqebªdoâ^qflkp lcªqebªofphfkbppªlcªqebª^ppbqp)ª^kaªcfkb*qrkfkdªqebªobdri^qlo vª`^mfqîªqlªqebªofphpªlc qebª^ppbqpªebiaª_vªb^èª_^kh+ªMolq^dlkfpqpªlcª?^pbiªFFªôdrbªqe^qªfqpªbppbkqfîªafc * cbobk`bªtfqeª?^pbiªFªfpªqe^qªfqªfpªcôªjlobª]ofph*pbkpfqfsb$+ Tefibªqefpªpbbjpªob^plk^_ibªcoljª^kªfkafsfarîª_^khÖpªmbopmb`qfsb)ªfqªfpªìbô qe^qªqebªibsbiªlcªjôhbqª^kaªcrkafkdªifnrfafqvªfpªklqªbuldbklrpivªdfsbkª_rqªabqbo * jfkbaªfkªqebªb`lkljvª^pª^ªtelibª^kaªebk`b)ªfjmloq^kqªâsbopbªcbba_^`hªbccb`qp jfdeqªôfpb+ªQefpªobnrfobpª^ªjlobªpvpqbjf`ªsfbtªlcªifnrfafqvªòfpbp+ª Geneva11_latest.qxp 07/05/2009 16:48 Page 15

Nature of Systemic Risk 15

2.2 Funding Liquidity and the Domino Model

Fqªfpª^ªqorfpjªqe^qªbkprofkdªqebªplrkakbppªlcªb^èªfkafsfarîªfkpqfqrqflkªbkprobp qebªplrkakbppªlcªqebªpvpqbjª^pª^ªtelib+ªEltbsbo)ªcloªqefpªmolmlpfqflkªqlª_bª^ªdlla mobpòfmqfsbªdrfabªcloª^`qflkp)ªtbªkbbaªqlªe^sbª`lkcfabk`bªqe^qª^`qflkpªqe^q bke^k`bªqebªplrkakbppªlcª^ªmôqf`riôªfkpqfqrqflkªtfiiªfksôf^_ivªmoljlqbªlsboîi pq^_fifqv+ªEltbsbo)ªqebªmolmlpfqflkªfpªsrikbo^_ibªqlªqebªcîi^`vªlcª`ljmlpfqflk+ .2 Fq fpªmlppf_ib)ªfkabbaªlcqbkªifhbiv)ªqe^qª^qqbjmqpª_vªfkafsfarîªfkpqfqrqflkpªqlªobj^fk plisbkqª`^kªmrpeªqebªpvpqbjªfkqlª`lii^mpb+ª Q^hbª^ªpfjmibªbu^jmib)ªfiirpqo^qbaª_vªcfdrobª/+ª?^khª.ªe^pª_looltbaªcoljª?^kh /+ª?^khª/ªe^pªlqeboª^ppbqp)ª^pªtbiiª^pªfqpªil^kpªqlª?^khª.+ªPrmmlpbªqe^qª?^khª/ªprc * cbopªòbafqªilppbpªlkªqebpbªlqeboªil^kp)ª_rqªqe^qªqebªòbafqtloqefkbppªlcª?^khª. obj^fkpªrkè^kdba+ªQebªilppªprccbobaª_vª?^khª/ªabmibqbpªfqpªbnrfqvª`^mfqî+ªFkªqeb c^`bªlcªprèª^ªpel`h)ª^ªmorabkqª`lropbªlcª^`qflkª_vª?^khª/ªfpªqlªobar`bªfqpªlsboîi bumlprob)ªplªqe^qªfqpª^ppbqª_llhªfpªqofjjbaªqlª^ªpfwbªqe^qª`^kª_bª`ôofbaª`ljcloq * ^_ivªtfqeªqebªpjîiboªbnrfqvª`^mfqî+ª

Figure 2 An Example of Interbank Relationships A L A L claim

obligation

Bank 1 Bank 2 Lkbªt^vªqlªbkprobªqebªplisbk`vªlcª?^khª/ªfpªcloªfqªqlªobar`bªfqpªlsboîiªibkafkd) fkìrafkdªfqpªibkafkdªqlª?^khª.+ª?vªobar`fkdªfqpªibkafkd)ª?^khª/ªobar`bpªfqpªofph bumlprob+ªEltbsbo)ªcoljª?^khª.Öpªmbopmb`qfsb)ªqebªobar`qflkªlcªibkafkdª_vª?^khª/ fpª^ªtfqeao^tîªlcªcrkafkd+ªRkibppª?^khª.ª`^kªcfkaªîqbok^qfsbªplro`bpªlcªcrkafkd) fqªtfiiªe^sbªqlªobar`bªfqpªltkª^ppbqªeliafkdp)ªbfqeboª_vª`roq^fifkdªfqpªibkafkd)ªloª_v pbiifkdªjôhbq^_ibª^ppbqp+ Fkªqebª`^pbªtebobªtbªe^sbªqebª`lj_fk^qflkªlcª%f&ª?^khª.ªklqªe^sfkdªîqbok^qfsb plro`bpªlcªcrkafkd)ª%ff&ªqebªobar`qflkªfkª?^khª/Öpªibkafkdª_bfkdªpbsbob)ª^kaª%fff& ?^khª.Öpª^ppbqpª_bfkdªplªfiifnrfaªqe^qªqebvª`^kªlkivª_bªpliaª^qªcfobªpîbªmof`bp)ªqebk qebªtfqeao^tîªlcªibkafkdª_vª?^khª/ªtfiiªcbbiªifhbª^ªorkªcoljªqebªmlfkqªlcªsfbtªlc ?^khª.+ªFkªlqeboªtloap)ª^ªmorabkqªpebaafkdªlcªbumlprobpªcoljªqebªmlfkqªlcªsfbt lcª?^khª/ªfpª^ªorkªcoljªqebªmlfkqªlcªsfbtªlcª?^khª.+ª>odr^_iv )ªqefpªqvmbªlcªorkªfp te^qªe^mmbkbaªqlªqebªRHª_^khªKloqebokªOl`h)ªtefèªc^fibaªfkª/--4)ª^pªtbiiª^p qebªRPªpb`rofqfbpªelrpbpª?bôªPqbôkpª^kaªIbej^kª?olqebop)ª_lqeªlcªtefèªprccboba òfmmifkdªorkpªfkª/--5+ Qebªfjmloq^k`bªlcªqebªif^_fifqfbpªpfabªmbopmb`qfsbªmrqpªfkqlªnrbpqflkªqebªqoâf * qflkîªsfbtªlcªeltªpvpqbjf`ªofphªmolm^d^qbpªqeolrdelrqªqebªcfk^k`fîªpvpqbj+ª> k^fsbªsbopflkªlcªprèª^ªsfbtª`lriaª_bªabmf`qbaªfkªCfdrobª0+ Geneva11_latest.qxp 07/05/2009 16:48 Page 16

16 The Fundamental Principles of Financial Regulation

Figure 3 The 'Domino' Model of Financial Contagion

A L A L A L claim claim claim

Bank A Bank B Bank C Ebob)ª_^khª>ªe^pª_looltbaªcoljª_^khª?)ª^kaª_^khª?ªe^pª_looltbaªcoljª_^kh @)ªbq`+ªQebk)ªfcª>ªq^hbpª^ªefqª^kaªabc^riqp)ªqebkª_^khª?ªtfiiªprccboª^ªilpp+ªFcªqebªilpp fpªiôdbªbklrdeªqlªtfmbªlrqª?Öpª`^mfqî)ªqebkª?ªabc^riqp+ª?^khª@ªqebkªq^hbpª^ªefq+ªFk qrok)ªfcªqebªilppªfpª_fdªbklrde)ª_^khª@ªabc^riqp)ªbq`+ªT bª`lriaªar_ªqefpªqebª]aljf * kl$ªjlabiªlcªcfk^k`fîª`lkq^dflk+ Qebªaljfklªjlabiªlcª`lkq^dflkªe^pª_bbkªbu^jfkbaªfkªkrjbolrpªpfjri^qflk pqrafbpª`lkar`qbaª^qª`bkqoîª_^khp)ª_rqªqebªrkfsbopîª`lkìrpflkªe^pª_bbkªqe^qªqeb fjm^`qªlcªqebªaljfklªjlabiªlcª`lkq^dflkªfpªsbo vªpjîi+ªFqªfpªlkivªtfqeªfjmi^rpf * _ivªiôdbªpel`hpªqe^qªqebªpfjri^qflkpªdbkbo^qbª^kvªjb^kfkdcriª`lkq^dflk+ªQebªob^* plkªfpªqe^qªqebªaljfklªjlabiªm^fkqpª^ªmf`qrobªlcªm^ppfsbªcfk^k`fîªfkpqfqrqflkpªtel pq^kaª_vª^kaªalªklqefkdª^pªqebªpbnrbk`bªlcªabc^riqpªrkcliap+ªFkªmo^`qf`b)ªeltbs * bo)ªqebvªtfiiªq^hbª^`qflkpªfkªob^`qflkªqlªrkcliafkdªbsbkqp)ª^kaªfkª^kqf`fm^qflkªlc fjmbkafkdªabc^riqp+ª

2.3 Loss Spiral – Asset Price Effect

Qerp)ªqebªaljfklªjlabiªalbpªklqªq^hbªprccf`fbkqª^``lrkqªlcªeltªmof`bpª^kaªjb^p* robaªofphpªè^kdb)ª^kaªeltªprèªè^kdbpªfjm^`qªlkªqebª_be^sflroªlcªjôhbqªmô * qf`fm^kqp+ªFkªqebªpfjmibpqªp`bkôflªlcªqebªaljfklªjlabi)ª^ppbqªmof`bpªôbªcfubaª^q qebfoª_llhªsîrbp)ª^kaª_î^k`bªpebbqpªq^hbª^ªefqªlkivªtfqeªabc^riq+ªPrèª^ªsfbtªfp l_plibqbªfkªqebªjôhbq*_^pbaªcfk^k`fîªpvpqbjªtebobª_î^k`bªpebbqpªôbªjôhbaªql jôhbqª^kaªtebobªcfk^k`fîªfkpqfqrqflkpªob^`qªqlªè^kdbpªfkªjb^probaªofphp+ª Fkabba)ªabc^riqpªkbbaªklqªbsbkª_bª kb`bppôv qlªdbkbo^qbª`lkq^dflk+ªMof`b è^kdbpªqebjpbisbpªj^vª_bªbklrde+ªTebkªcfk^k`fîªfkpqfqrqflkpªjôhªqebfoª_î * ^k`bªpebbqpªqlªjôhbq)ªè^kdbpªfkªmof`bpªibâªqlªilppbpªqe^qªj^vª_bªprccf`fbkqªql qo^kpjfqªqebªpel`hpªqlªlqeboªfkpqfqrqflkpªbsbkªtebkªqebvªalªklqªeliaªì^fjp ^d^fkpqªb^èªlqebo +ªIlppbpªtlopbkªcrkafkdªifnrfafqvªcloªj^kvªcfk^k`fîªfkpqfqr * qflkp)ªclo`fkdªqebjªqlªpebaªbsbkªjlobª^ppbqpªtefèªcroqeboªabmobppbpªmof`bpª^ka fkòb^pbpªilppbp)ª^kaªplªlk+ªQebªilppªpmfoîªibâpªqlªpeômª^ppbqªmof`bªjlsbjbkqp bpmb`fîivª^qªqfjbpªlcªcfk^k`fîªòfpfp+ª Fcªdob^qboªabj^kaªcloªqebª^ppbqªmrqpªrmtôaªmobpprobªlkªfqpªmof`b)ªqebkªqebobªfp qebªmlqbkqfîªcloª^ªcbba_^`hªbccb`qªfkªtefèªpqolkdboª_î^k`bªpebbqpªcbbaªdob^qbo abj^kaªcloªqebª^ppbq)ªtefèªfkªqrokªo^fpbpªqebª^ppbqÖpªmof`bª^kaªibâªqlªpqolkdboª_î* ^k`bªpebbqp+ªE^sfkdª`ljbªcriiª`fo ìb)ªqebªcbba_^`hªmol`bppªdlbpªqeolrdeª^klqebo qrok+ªQebª`fo `riôªcfdrobªlkªqebªibcqªfkªCfdrobª1ªfiirpqo^qbpªqebªcbba_^`hªarofkdª^ _llj+ªKlqbªqebªòfqf`îªolibªmi^vbaª_vªmol`vìf`îªibsbo^db+ Qebªjbè^kfpjªtlohpªfkªobsbopbªfkªaltkqrokp+ª@lkpfaboª^ªcîiªfkªqebªmof`bªlc Geneva11_latest.qxp 07/05/2009 16:48 Page 17

Nature of Systemic Risk 17

Figure 4 The Loss Spiral (Balance Sheet Spiral)

Adjust leverage Adjust leverage ^k

Stronger Weaker Increase balance sheets balance sheets Reduce B/S size B/S size

Asset price boom Asset price decline

^ppbqªebiaªtfabivª_vªebadbªcrkapª^kaª_^khp+ªQebk)ªqebªkbqªtloqeªlcªprèª^kªfkpqf* qrqflkªcîipªc^pqboªqe^kªqebªo^qbª^qªtefèªqebª^ppbqªcîipªfkªsîrb)ªbolafkdªfqpªbnrfqv `rpeflk+ªLkbªt^vªqe^qªqebª_^khª`^kªobpqlobªfqpªbnrfqvª`rpeflkªfpªqlªpbiiªpljbªlc fqpª^ppbqp)ª^kaªrpbªqebªmol`bbapªqlªm^vªaltkªfqpªab_q+ªQebª`fo `riôªèôqªlkªqeb ofdeqªfkªCfdrobª1ªfiirpqo^qbpªqebªcbba_^`hªarofkdª^ª_rpq+ªKlqbªqebªfjmloq^k`bªlc jôhfkdªqlªjôhbq+ª?vªpvkèolkfwfkdªqebª^`qflkpªlcªjôhbqªmôqf`fm^kqp)ªqebªcbba* _^`hªbccb`qpªôbª^jmifcfba+ Q^hbªqebªbmfplabªlcªqebªafpqobppªprccbobaª_vªBrolmb^kªifcbªfkpro^k`bª`ljm^kfbp fkªqebªprjjboªlcª/--/+ª?vªqebªk^qrobªlcªfkprobopÖª_î^k`bªpebbqp)ªqebvªafaªklqª_lo* oltªcoljªb^èªlqeboª^pª_^khpªal+ªEltbsbo)ªtebkªpql`hªmof`bpªmirj_baªkbtªiltp fkªqebªprjjboªlcª/--/)ªqebªBrolmb^kªifcbªfkprobopªclrkaªqe^qªqebfoªobdri^qlovª`lk* pqo^fkqpªtbobª_bdfkkfkdªqlª_fka+ªFkªqebªR+H+)ªcloªfkpq^k`b)ªqebªrprîªÖobpfifbk`bªqbpqÖ ^mmifbaªqlªifcbªfkpro^k`bª`ljm^kfbpªfkªtefèªqebªcfojªe^pªqlªabjlkpqo^qbªplisbk * `vªfkªqebªc^`bªlcª^ªcroqeboª/2"ªpql`hªjôhbqªabìfkbªt^pª_bdfkkfkdªqlª_fka+ Dboj^kª^kaªPtfppªfkprobopªtbobªbsbkªjlobª`lkpqo^fkba+ªQebªobjbavªcloªqebpb fkprobopªt^pªqlªpbiiªpql`hp)ªplª^pªqlªobar`bªqebfoªbumlprobpªqlªqebj+ªEltbsbo)ªiôdb p`îbªpîbpªjbobivªpbo sbaªqlªabmobppªmof`bpªcroqebo )ªj^hfkdªqebª`lkpqo^fkqpª_fka eôabo+ªQefpªdbkbo^qbaª^ªcroqeboªolrkaªlcªpbiifkd)ª^kaªplªlk+ªQebªobdri^qlopªfkªqeb ^ccb`qbaª`lrkqofbpªprpmbkabaªqebªplisbk`vªqbpqpªcloªpbsboîªtbbhpªrkqfiªqebªòfpfp ^_^qba+ªCloªfkpq^k`b)ªqebªR+H+ªCfk^k`fîªPbo sf`bpª>rqelofqvªafirqbaªqebªobpfifbk`b qbpqªplª^pªqlªmobbjmqªqebªabpq^_fifwfkdªclo `baªpîbpªlcªpql`hpª_vªqebªj^gloªjôhbq mi^vbop+.3 Qebªaljfklªjlabiªlcª`lkq^dflkªfpªci^tba)ª^kaªfpªklqªrpbcriªcloªrkabopq^kafkd cfk^k`fîª`lkq^dflkªfkª^ªjlabok)ªjôhbq*_^pbaªcfk^k`fîªpvpqbj+ªFkpqbâ)ªqebªhbv qlªrkabopq^kafkdªqebªbsbkqpªlcªqebªdil_îªifnrfafqvª^kaªòbafqªòrkèªfkª/--4*5ªfp qlªcliiltªqebªob^`qflkpªlcªqebªcfk^k`fîªfkpqfqrqflkpªqebjpbisbpªqlªmof`bªè^kdbp) ^kaªqlªpefcqpªfkªqebªjb^probaªofphp+ª Qebªqo^kpfqflkªqlª^ªjôhbq*_^pbaªcfk^k`fîªpvpqbjªfpªjlpqªâs^k`baªfkªqeb RkfqbaªPq^qbp)ª_rqªfqpªfkcirbk`bªe^pª_bbkªsbovªmolclrkaªcloªqebªdil_îªcfk^k`fîªpvp* qbjª^pª^ªtelib+ªBsbkªcloªqoâfqflkîªabmlpfq*q^hfkdª_^khp)ªqebfoªjôdfkîªplro`bªlc crkafkdªe^pª_bbkªqebª`^mfqîªjôhbqp)ªcloªbu^jmibªqeolrdeªobmroè^pbª^dobbjbkqp loª`ljjbo `fîªm^mbo+ªQefpªfpª_b`^rpbªqebªqoâfqflkîªplro `bªlcªcrkafkdªprèª^p obq^fiªabmlpfqpªôbªrprîivªfkprccf`fbkqivªcibuf_ibªqlªcrkaªbum^kpflkpªlcªibkafkd+ Jloblsbo)ªqebªpmobâfkdªlcªcrkafkdªqlªfkìrabª`^mfqîªjôhbqpªt^pªlcqbkªpbbkª_v _^khp)ªobdri^qlopª^kaªpeôbeliabopª^pªfkòb^pfkdªqebªifnrfafqvª^kaªebk`bªqebªpli * Geneva11_latest.qxp 07/05/2009 16:48 Page 18

18 The Fundamental Principles of Financial Regulation

sbk`vªlcª^ªcfk^k`fîªfkpqfqrqflkªQlªqefpªbuqbkq)ªqebªqoâfqflkîªafpqfk`qflkª_bqtbbk _^khfkdª^kaª`^mfqîªjôhbqpªe^pª_b`ljbªsbo vªafccf`riqªqlªao^t +ªFkabba)ªqebªibfq * jlqfcªcloªqebªòfpfpªlcª/--4*5ªe^pª_bbkªqebª^jmifcf`^qflkªlcªqebª_^khfkdªòfpfp qeolrdeª`^mfqîªjôhbqª`lkafqflkp)ªpmroobaªlkª_vªqebªmbo s^pfsbªrpbªlcªjôh*ql* jôhbqª^``lrkqfkdª^kaªjôhbq*pbkpfqfsbªofphªj^k^dbjbkqªpvpqbjp+ Tebkªcfk^k`fîªfkpqfqrqflkpªôbªfkqbdo^qbaªfkqlªqebª`^mfqîªjôhbqp)ªjôhbqª`lk* afqflkpªaf`q^qbªlsboîiªcrkafkdª`lkafqflkp+ªQebª_î^k`bªpebbqªavk^jf`pªlcªcfk^k * `fîªfkqbojbafôfbpªqe^qªjôhªqebfoª_î^k`bªpebbqpªqlªjôhbqª^kaªrpbªjôhbqªpbkpf* qfsbªofphªjb^probpªe^sbªpljbªafpqfk`qfsbªcb^qrobp+ª

2.4 Margin/Haircut Spiral

Qebªilppªpmfoîªfpªklqªmrobivªarbªqlª^ppbqªmof`bªbccb`qp)ªpfk`bª^ªibsbo^dbaªfkpqfqrqflk qe^qªprccbopªjôh*ql*jôhbqªilppbpªlcª!uªe^pªqlªobar`bªfqpªmlpfqflkª_vª!uªqfjbpªfqp ibsbo^dbªo^qfl+ª Qebª jôdfk,e^fo`rq pmfoî obfkclo`bpªqebªilppªpmfoîªpfk`bªfqªclo `bpªqebªcfk^k`fî fkpqfqrqflkªqlªobar`bªfqpªibsbo^dbªo^qflªlkªqlmªlcªfq+ªJôdfkpª^kaªe^fo `rqpªfjmif`fq* ivªabqbojfkbªqebªjûfjrjªibsbo^dbª^ªcfk^k`fîªfkpqfqrqflkª`^kªâlmq+ Jôdfkp,e^fo`rqpªpmfhbªfkªqfjbpªlcªiôdbªmof`bªaolmpª^kaªqebob_vªibâªqlª^ªdbkboî qfdeqbkfkdªlcªibkafkd+ª?orkkbojbfboª^kaªMbabopbkª%/--6&ªåªpbbªCfdrobª2ªåªpelt qe^qª^ªsf`flrpª`vìbªbjbodbp)ªtebobªefdeboªjôdfkpª^kaªe^fo `rqpªclo`bªab*ibsbo^d* fkdª^kaªjlobªpîbp)ªtefèªfkòb^pbªjôdfkpªcroqeboª^kaªclo `bªjlobªpîbp)ªibâfkd qlªqebªmlppf_fifqvªlcªjriqfmibªbnrfif_of^+ .4 >pª^ppbqªmof`bpªaolm)ªofphªjb^probpª%ifhb Sîrb*^q*Ofph&ªfkòb^pb)ªtefèªklqªlkivªibâªqlªefdeboªjôdfkpª^kaªbuqbokîªcrka* fkdª`lpqp)ª_rqªîplªobar`bªofph*^mmbqfqbªtfqefkª_^khp+ªOfphªj^k^dbopªpqbmªlkªqeb _o^hbpª^kaªclo`bªqoâbopªtfqefkª^ª_^khªqlªab*ibsboªqebfoªmlpfqflkp+ªIbsbo^dbªfpªmol *

Figure 5 Two Liquidity Spirals:

Source: Brunnermeier and Pedersen (2009)

Geneva11_latest.qxp 07/05/2009 16:48 Page 19

Nature of Systemic Risk 19

`vìf`î+ªTebkªj^kvªjôhbqªmôqf`fm^kqpªab*ibsboªfkªpqobppbaªbksfolkjbkqp)ªifn * rfafqvªafp^mmbôpªaltkª^ª_i^`hªelib+ .5 Arofkdªaltkqrokpª_lqeªpmfoîpªclo `bªibsbo^dbaªfksbpqlopªqlªrktfkaªqebfoªmlpf * qflkpª`^rpfkdª^&ªjlobªilppbpª^kaª_&ªefdeboªjôdfkp,e^fo `rqpª^kaªqfdeqboªibkafkd pq^kaôap)ªtefèªfkªqrokªbu^`bo_^qbªqebªcrkafkdªmol_ibjp)ª^kaªplªlk+ª?lqeªpmfoîp ibâªqlªmol`vìf`îfqv+ Cfdrobª3ª_biltªpeltpªbjmfof`îªbsfabk`bªcloªqebªjôdfkªpmfoîªcloªqebªqebkªRP fksbpqjbkqª_^khp+.6 Fqªpeltpªqebªp`^qqboªèôqªlcªqebªtbfdeqbaª^sbo^dbªlcªqebªnrô* qboivªè^kdbªfkª^ppbqpª^d^fkpqªqebªnrôqboivªè^kdbªfkªibsbo^dbªlcªqebª%qebk&ªcfsb pq^ka*îlkbªRPªfksbpqjbkqª_^khpªåª?bôªPqbôkp)ªDliaj^kªP^èp)ªIbej^k ?olqebop)ªJboofiiªIvkèª^kaªJlod^kªPq^kibv+ª

Figure 6 Leverage Growth and Asset Growth of US Investment Banks 0 ) 2 y l r e t r a 0 u 1 Q 2008-1 % (

h 2007-3 t 0 w o

r 2007-4 G

t e 0 s 1 s - A

l 1998-4 a t o 0 T 2 - -20 -10 0 10 20 Leverage Growth (% Quarterly) Source: SEC; Adrian and Shin (2007)

Ibsbo^dbªfpªefdeªtebkª_î^k`bªpebbqpªôbªiôdb)ªtefibªibsbo^dbªfpªiltªtebkª_î * ^k`bªpebbqpªôbªpjîi+ªQefpªfpªbu^`qivªqebªlmmlpfqbªlcªqebªqoâfqflkîªcfkafkdªclo elrpbeliap)ªtelpbªibsbo^dbªfpªefdeªtebkª_î^k`bªpebbqpªôbªpjîi+ªCloªfkpq^k`b)ªfc ^ªelrpbeliaªltkpª^ªelrpbªqe^qªfpªcfk^k`baª_vª^ªjloqd^db)ªibsbo^dbªcîipªtebkªqeb elrpbªmof`bªfkòb^pbp)ªpfk`bªqebªbnrfqvªlcªqebªelrpbeliaªfpªfkòb^pfkdª^qª^ªjrè c^pqboªo^qbªqe^kª^ppbqp /-+ªCloªfksbpqjbkqª_^khp)ªeltbsbo )ªqebªobi^qflkpefmªfp obsbopba+ªFqªfpª^pªfcªqebªelrpbeliaboªobpmlkabaªqlª^kªfkòb^pbªfkªelrpbªmof`bpª_v fkòb^pfkdªqebªjloqd^dbªil^kªqlªsîrbªo^qflªplªqe^qªibsbo^dbªfkòb^pbpªfkªpmfqbªlc qebªfkòb^pbaªsîrbªlcªefpªelrpb+ >ªmol`vìf`îªibsbo^dbªo^qflªlccbopª^ªtfkaltªlkªqebªklqflkªlcªcfk^k`fîªpvpqbj ifnrfafqv+ªTebkªibsbo^dbªfpªmol`vìf`î)ªqebªabj^kaª^kaªprmmivªobpmlkpbªqlª^ppbq mof`bªè^kdbpª`^kª^jmifcvªpel`hp+ªQlªpbbªqefp)ª`lkpfaboª^kªfkòb^pbªfkªqebªmof`bªlc ^ppbqpªebiaªtfabivª_vªibsbo^dbaªjôhbqªmi^vbopª^kaªfkqbojbafôfbp+ªQebªfkòb^pbªfk qebªmof`bªlcª^ppbqpªpqobkdqebkpªqebªmi^vbopÖª_î^k`bªpebbqp)ªpfk`bªqebªkbqªtloqeªlc ibsbobaªmi^vbopªfkòb^pbpª^pª^ªmolmloqflkªlcªqebfoªqlqîª^ppbqp+ª Tebkª_î^k`bªpebbqpª_b`ljbªpqolkdbo )ªibsbo^dbªcîip+ªQ lªqebªbuqbkqªqe^qªqeb Geneva11_latest.qxp 07/05/2009 16:48 Page 20

20 The Fundamental Principles of Financial Regulation

fkqbojbafôvªt^kqpªqlª^slfaªeliafkdªqllªjrèªbnrfqvª%cloªfkpq^k`b)ª_b`^rpb obqrokªlkªbnrfqvª_b`ljbpªqllªilt&)ªfqªtfiiª^qqbjmqªqlªobpqlobªibsbo^db+ªLkbªt^vªfq `^kªalªplªfpª_vª_looltfkdªjlob)ª^kaªrpfkdªqebªmol`bbapªqlª_rvªjlobªlcªqebª^ppbqp fqªîobâvªeliap+ª Qebobªfpª^ªjlobªpr_qibªcb^qrobªlcªCfdrobª3ªtefèªqbiipªrpªjrèª^_lrqªqebªcfk^k`* fkdªab`fpflkpªlcªcfk^k`fîªfkqbojbafôfbp+ªOb`îiªqe^qªqebªelofwlkqîªûfpªjb^probp qebª%nrôqboiv&ªè^kdbªfkªibsbo^db)ª^pªjb^probaª_vªqebªè^kdbªfkªildª^ppbqpªjfkrp qebªè^kdbªfkªildªbnrfqv +ªQebªsboqf`îªûfpªjb^probpªqebªè^kdbªfkªildª^ppbqp+ Ebk`b)ªqebª12*abdobbªifkbªfkaf`^qbpªqebªpbqªlcªmlfkqpªtebobªbnrfqvªfpªrkè^kdba+ >_lsbªqebª12*abdobbªifkbªbnrfqvªfpªfkòb^pfkd)ªtefibª_biltªqebª12*abdobbªifkb) bnrfqvªfpªabòb^pfkd+ª>kvªpqo^fdeqªifkbªtfqeªpilmbªbnrîªqlª.ªfkaf`^qbpª`lkpq^kq doltqeªlcªbnrfqv)ªtfqeªqebªfkqbo`bmqªdfsfkdªqebªdoltqeªo^qbªlcªbnrfqv+ >ªcb^qrobªqlªklqbªcoljªCfdrobª3ªfpªqe^qªqebªpilmbªlcªqebªp`^qqboªèôqªfpªìlpbªql .)ªfjmivfkdªqe^qªbnrfqvªfpªfkòb^pfkdª^qª^ª`lkpq^kqªo^qbªlkª^sbo^db+ªQerp)ªbnrfqv pbbjpªqlªmi^vªqebªolibªlcªqebªclo `fkdªsôf^_ib)ª^kaªîiªqebªâgrpqjbkqªfkªibsbo^db q^hbpªmi^`bªqeolrdeªbum^kpflkpª^kaª`lkqo^`qflkpªlcªqebª_î^k`bªpebbqªo^qeboªqe^k qeolrdeªqebªo^fpfkdªloªm^vfkdªlrqªlcªbnrfqv+ªP^faªafccbobkqiv)ªfqªpeltpªeltªqebªjô* dfkªpmfoîª^kaªilppªpmfoîªobfkclo `bªb^èªlqebo+ >ªìlpboªillhª^qªobmlªe^fo`rqp)ªtefèªabqbojfkbªqebªfjmif`fqªjûfjrjªibsbo^db qe^qªfpªmbojfqqbaªfkª`lii^qboîfwbaª_looltfkdªqo^kp^`qflkpªprèª^pªobmro è^pb ^dobbjbkqpª%obmlp&)ªfpªfkpqor`qfsbªpfk`bªobmlpªôbªqebªmofjôvªplro`bªlcªcrkafkdªclo jôhbq*_^pbaª_^khfkdªfkpqfqrqflkp+ªFkª^ªobmro è^pbª^dobbjbkq)ªqebª_looltboªpbiip ^ªpb`rofqvªqla^vªcloª^ªmof`bª_biltªqebª`roobkqªjôhbqªmof`bªlkªqebªrkabopq^kafkd qe^qªfqªtfiiª_rvªfqª_^`hªfkªqebªcrqrobª^qª^ªmob*^dobbaªmof`b+ªQebªafccbobk`bª_bqtbbk qebª`roobkqªjôhbqªmof`bªlcªqebªpb`rofqvª^kaªqebªmof`bª^qªtefèªfqªfpªpliaªfpª`îiba qebª]e^fo`rq$ªfkªqebªobml)ª^kaªcir`qr^qbpªqldbqeboªtfqeªcrkafkdª`lkafqflkpªfkªqeb jôhbq+ªª Qebªcir`qr^qflkpªfkªqebªe^fo `rqªiôdbivªabqbojfkbªqebªabdobbªlcªcrkafkdª^s^fi * ^_ibªqlª^ªibsbo^dbaªfkpqfqrqflk+ªQebªob^plkªfpªqe^qªqebªe^fo`rqªabqbojfkbpªqebªjû* fjrjªmbojfppf_ibªibsbo^dbª^èfbsbaª_vªqebª_looltbo+ªFcªqebªe^fo`rqªfpª/")ªqebª_lo* oltboª`^kª_looltª65ªaliiôpªcloª.--ªaliiôpªtloqeªlcªpb`rofqfbpªmibadba+ªQebk)ªql eliaª.--ªaliiôpªtloqeªlcªpb`rofqfbp)ªqebª_looltboªjrpqª`ljbªrmªtfqeª/ªaliiôpªlc bnrfqv+ªQerp)ªfcªqebªobmlªe^fo `rqªfpª/")ªqebªjûfjrjªmbojfppf_ibªibsbo^dbª%o^qfl lcª^ppbqpªqlªbnrfqv&ªfpª2-+ Prmmlpbªqe^qªqebª_looltboªibsbo^dbpªrmªqebªjûfjrjªmbojfqqbaªibsbi+ªPrèª^k ^`qflkªtlriaª_bª`lkpfpqbkqªtfqeªqebªl_gb`qfsbªlcªjûfjfwfkdªqebªobqrokªlkªbnrf * qv)ªpfk`bªibsbo^dbªj^dkfcfbpªobqrokªlkªbnrfqv+ªQebª_looltboªqerpªe^pª^ªefdeivªibsbo* ^dbaª_î^k`bªpebbqªtfqeªibsbo^dbªlcª2-+ªªFcª^qªqefpªqfjb)ª^ªpel`hªqlªqebªcfk^k`fîªpvp* qbjªo^fpbpªqebªjôhbqªe^fo `rq)ªqebkªqebª_looltboªc^`bpª^ªmobaf`^jbkq+ªªPrmmlpb qe^qªqebªe^fo`rqªofpbpªqlª1"+ªQebk)ªqebªmbojfqqbaªibsbo^dbªeîsbpªqlª/2)ªcoljª2-+ Qebª_looltboªqebkªc^`bpª^ªeôaªèlf`b+ªBfqeboªfqªjrpqªo^fpbªkbtªbnrfqvªplªqe^qªfqp bnrfqvªalr_ibpªcoljªfqpªmobsflrpªibsbi)ªloªfqªjrpqªpbiiªeîcªfqpª^ppbqp)ªloªpljbª`lj * _fk^qflkªlcª_lqe+ Klqbªqe^qªqebªfkòb^pbªfkªe^fo `rqpªtfiiªalªjlpqªeôjªtebkªpqôqfkdªcoljªsbo v iltªibsbip+ª>ªmbo `bkq^dbªmlfkqªfkòb^pbªcoljª."ªqlª/"ªtfiiªjb^kªibsbo^dbªe^pªql cîiªcoljª.--ªqlª2-+ª?rqª^ªmbo `bkq^dbªmlfkqªfkòb^pbªcoljª/-"ªqlª/."ªtfiiªe^sb lkivª^ªjôdfkîªbccb`qªlkªqebªfkfqfîªibsbo^dbªlcª2+ªFkªqefpªpbkpb)ªqebª]è^pfkdªlc vfbia$ª^qªqebªmb^hªlcªqebªcfk^k`fîª`vìbªfpªbpmb`fîivªmob`ôflrp)ªpfk`bªqebªrktfka * Geneva11_latest.qxp 07/05/2009 16:48 Page 21

Nature of Systemic Risk 21

Table 1 Haircuts on Repo Agreements (percent)

Securities April-07 August-08 U.S. treasuries 0.25 3 Investment-grade bonds 0–3 8–12 High-yield bonds 10–15 25–40 Equities 15 20 Senior leveraged loans 10–12 15–20 Mezzanine leveraged loans 18–25 35+ Prime MBS 2–4 10–20 ABS 3–5 50–60

Source: IMF Global Financial Stability Report, October 2008

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2.5 Procyclicality and Margin Spirals

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22 The Fundamental Principles of Financial Regulation

Qvmf`îivªqebpbªofphªjb^probpªôbªbpqfj^qbaªk^fsbivªrpfkdªm^pqªa^q^+ªEbk`b)ª^ªpeôm qbjmloôvªmof`bªaolmªibâpªqlª^ªpeômªfkòb^pbªfkªqebªbpqfj^qbpªlcªqebpbªofphªjb^p * robp+ªQefpªefhbpªjôdfkp,e^fo`rqp)ª`lkpqo^fkpªfksbpqlop)ª^kaªj^vªclo`bªqebjªqlªpbii lccªqebfoª^ppbqp+ªMôâluf`îiv)ªqebªclo`baªcfob*pîbªjfdeq)ªgrpqfcvªqebªpeômªfkòb^pb fkªqebªofph*jb^probªbu*mlpq+ªCloªbu^jmib)ª^pªfkª^ª_lljªme^pbªsli^qfifqvª^kaªabc^riq bpqfj^qbpªôbªilt)ªjôdfkpªtfiiª_bªiltªtefèªîiltpªefdeboªibsbo^dbª^kaªprmmloqp qebªbum^kpflkôvªme^pb+ªTebkªqebªcfopqªâsbopbªpel`hpªefq)ªqebªsli^qfifqvªbpqfj^qbp pellqªrmªibâfkdªqlª^ªabibsbo^dfkdªmol`bppªabpòf_baª_vªqebªjôdfkªpmfoî+ªFkªpeloq) fcªqebªl_gb`qfsbªcrk`qflkªlcªfkafsfarîªfkpqfqrqflkpªfpªqlªj^fkq^fkªobqrokªlkªbnrf * qv)ªloªsîrbª^qªofph)ªibsbo^dbªtfiiª_bªmol`vìf`î+ªFabîiv )ªlkbªpelriaªq^hbªprè bkaldbklrpªbccb`qpªarbªqlªofphªjfpjb^probjbkqªfkqlª^``lrkq+ª Pb`lka)ªqebªsli^qfifqvªlcª^ªmof`bªmol`bppª`lriaª_bªqfjb*sô vfkd+ª>ªpeômªmof`b abìfkbªj^vªpfdkîªqe^qªtbªôbª^_lrqªqlªbkqboªjlobªsli^qfibªqfjbp+ª@lkpbnrbkqiv ) jôdfkpª^kaªe^fo`rqpªpelriaª_bªiôdboª^kaªibkafkdªpelriaª_bªobar`baª^cqboªprèª^ mof`bªabìfkb+ª>kªbuqobjbªbu^jmibªt^pªqebªpfqr^qflkªfkª>rdrpqª/--4)ªtebkªqeb ^ppbq*_^`hbaª`ljjbo `fîªm^mboªjôhbqªaofbaªrmª`ljmibqbiv +ªMofloªqlªqebªòfpfp) ^ppbq*_^`hbaª`ljjbo`fîªm^mboªt^pªîjlpqªofph*cobbª_b`^rpbªlcªlsbo `lii^qboîfw^* qflkªåªf+b+ªcfopqªilppbpªtlriaª_bª^pprjbaª_vªiltboªqo^kèbp+ªEltbsbo )ªfkª>rdrpq /--4)ªqebªlsbo `lii^qboîfw^qflkª`rpeflkªbs^mlo^qba)ªj^hfkdªprèª^ppbqpªjrè jlobªofphv+ª@lkpbnrbkqiv)ªfksbpqlopªtbobªrktfiifkdªqlªibqªpqor`qrobaªfksbpqjbkq sbefìbpªolii*lsboªqebfoªab_q+ª Qebªqefoaªob^plkªtevªjôdfkpªfkòb^pbªtebkªmof`bpªaolmªfpªqe^qª^pvjjbqof`* fkcloj^qflkªcof`qflkpªbjbodb+ª>pªilppbpªjlrkq)ªab_qª_b`ljbpªjlobªofphvª^ka ebk`bªjlobª]fkcloj^qflkªpbkpfqfsb+$ª>ipl)ªcfk^k`fbopª_b`ljbªjlobª`ôbcriª^_lrq tebqeboªqlª^``bmqª^ªmlliªlcª^ppbqpª^pª`lii^qboîªpfk`bªqebvªcbôªob`bfsfkdª^ªmôqf`r * iôivª_âªpbib`qflkªlcª^ppbqp+ªQebvªjfdeq)ªcloªbu^jmib)ª_bªtloofbaªqe^qªpqor`qroba fksbpqjbkqªsbefìbpªpliaªqebªdlla)ª]pbii^_ib$ª^ppbqpª^kaªibcqª^pª`lii^qboîªlkivªqeb _â)ªibppªsîr^_ib)ª]ibjlkp+$ª

2.6 Externalities – Rationale for Regulation

Qebªmobpbk`bªlcªifnrfafqvªpmfoîpªmboªpbªalbpªklqªgrpqfcvªdlsbokjbkqªfkqbosbkqflkp+ Lkbªjrpqªôdrbªcoljª^ªpl`fîªtbicôbªmbopmb`qfsbªqe^qªcfk^k`fîªfkpqfqrqflkpªlsbo * bumlpbªqebjpbisbpªqlªqebªofphªlcªdbqqfkdª`^rdeqªfkª^ªifnrfafqvªpmfoîª_vªeliafkd efdeivªibsbobaªmlpfqflkpªtfqeªbu`bppfsbªj^qrofqv*jfpj^qèbp+ªT bªôdrbªqe^qªqefp fpªfkabbaªqebª`^pbªarbªqlªqebªcliiltfkdªqtlªofph*pmfiilsboªbuqbokîfqfbpªqe^qªtb îirabaªqlªfkª@e^mqboª.7

^& Cfob*pîbªbuqbokîfqfbp _& Fkqbo`lkkb`qbakbppªbuqbokîfqfbp

Qebªcfob*pîbªbuqbokîfqvªôfpbpªpfk`bªb^èªfkafsfarîªcfk^k`fîªfkpqfqrqflkªalbpªklq q^hbªfkqlª^``lrkqªqebªmof`bªfjm^`qªfqpªltkªcfob*pîbpªtfiiªe^sbªlkª^ppbqªmof`bpªfkª^ mlppf_ibªcrqrobªifnrfafqvªòrkè+ªEbk`b)ªcfob*pîbpª_vªpljbªfkpqfqrqflkpªpmfiilsbo ) ^kaªâsbopbivª^ccb`qªqebª_î^k`bªpebbqªlcªlqebop)ª`^rpfkdª^ªkbd^qfsbªbuqbokîfqv + QefpªbuqbokîfqvªfpªmlfkqbaªlrqªfkªPqfdifqwª%.65/&ª^kaªDb^k^hlmilpª^ka Mlibjôè^hfpª%.653&ª^kaªpr_pbnrbkqivª^mmbôbaªfkªkrjbolrpª^`âbjf`ªm^mbop+ /. Geneva11_latest.qxp 07/05/2009 16:48 Page 23

Nature of Systemic Risk 23

Fqªfpªôdr^_ivªqebªj^fkªo^qflkîbªcloª_^khªobdri^qflk+ // Fkªdbkboî)ª^ªcfk^k`fîªfkpqfqrqflkªfpªîplªklqª`lk`bokbaªeltªj^kvªlqebopªfqªtfii ao^dªaltk)ªpelriaªfqªc^fi+ªBpmb`fîivªqebªc^firobªlcª_fdª^kaªfkqbo `lkkb`qbaªfkpqfqr* qflkpªtlriaª_ofkdªaltkªqebpbªkbd^qfsbªofph*pmfiilsboªbccb`qpªlkªlqebop+ª>kªlm^nrb jôhbqªpqor`qrob)ª^pªcloªbu^jmibªfkªlsbo*qeb*`lrkqboªjôhbqpª%LQ@ªjôhbqp&)ªbu^`* bo_^qbpªqebpbªbccb`qp+/0 Te^qªj^hbpªj^qqbopªbsbkªtlopbªfpªqe^qªqebªmlqbkqfîªmolpmb`qªlcª^ªdlsbokjbkq _^filrqªdfsbpªfkpqfqrqflkpªqebªfk`bkqfsbªqlª_b`ljbª]qllª_fdªqlªc^fi$ª^kaª]qllªfkqbo * `lkkb`qbaªqlªc^fi+$ªQebªiôdboª^kªfkpqfqrqflk)ªloªqebªjlobªfkqbo `lkkb`qbaªfqªfp)ªqeb efdeboªqebªmol_^_fifqvªqe^qª^ªcfk^k`fîªfkpqfqrqflkªtfiiª_bª_^fibaªlrqªfkªqfjbpªlcªòf* pfp+ªFkªpeloq)ªqebª`roobkqªpvpqbjªfjmif`fqivªpr_pfafwbpªfkpqfqrqflkpªqe^qª`^rpbªkbd^ * qfsbªbuqbokîfqfbpªlkªlqebop+ªEbk`b)ªtbªtfiiªôdrbªfkªqebªpr_pbnrbkqª@e^mqboªqe^q qebªobdri^qlovªco^jbtlohªe^pªqlªcl`rpªlkªofphªpmfiilsbop)ªf+b+)ªbuqbokîfqfbp+ª Fkªdbkboîªfqªjfdeqª_bªabpfo^_ibªcloªqebªjlkbqô vª^rqelofqvªqlªpqbmªfkª^cqboª^ ]lk`bªfkª^ª_irbªjllk$ªifnrfafqvªpel`h /1)ªpfk`bªfqªfpªpl`fîivªklqªlmqfjîªcloªb^è _^khªqlª_bªobnrfobaªqlªmolsfpflkª^d^fkpqªqelpbªpel`hp+ªEltbsbo )ªpfk`bªcfk^k`fî fkpqfqrqflkpªbumb`qªqefp)ªqebvªtfiiªîqboªqebfoª_be^sfloªåªtefèªmolsfabpª^klqebo o^qflkîbªcloªcfk^k`fîªobdri^qflkp+

2.7 Aggregate Liquidity Expansions and Contractions

Tbª`lkìrabªqefpªpb`qflkª_vªob`îifkdªqe^qªfkpqfqrqflkpªqe^qªeliaª^ppbqpªtfqeªefde jôhbqªifnrfafqvª%loªpeloq*qbojª^ppbqp&ª`^kªâgrpqªqebfoª_î^k`bªpebbqªpfwbªcibuf_iv _vªobar`fkdªibkafkdª^kaªklqªoliifkdªlsboªab_q+ªEltbsbo )ªtebkªqebªcfk^k`fîªpvp * qbjª^pª^ªtelibªeliapªilkd*qboj)ªfiifnrfaª^ppbqpªcfk^k`baª_vªpeloq*qbojªif^_fifqfbp) ^kvªqbkpflkpªobpriqfkdªcoljª^ªpeôm)ªpvkèolkfwbaª`lkqo^`qflkªlcª_î^k`bªpebbqp tfiiªpeltªrmªpljbtebobªfkªqebªpvpqbj+ªBsbkªfcªpljbªfkpqfqrqflkpª`^kªâgrpqªaltk qebfoª_î^k`bªpebbqpªcibuf_iv)ªqebobªtfiiª_bªmfkèªmlfkqpªfkªqebªpvpqbjªqe^qªtfiiª_b bumlpbaª_vªprèªab*ibsbo^dfkd+ª Cir`qr^qflkpªfkªibsbo^dbªfkªqebª`lkqbuqªlcªtfabpmobâªpb`robaªibkafkdªbumlpbp qebªjvqeªlcª]irjmªlcªifnrfafqv$ªfkªqebªcfk^k`fîªpvpqbj+ªFqªfpªqbjmqfkdªqlª_bªjfpiba _vªlroªrpbªlcªi^kdr^dbªfkqlªqefkhfkdªqe^qª]ifnrfafqv$ªobcbopªqlª^ªpql`hªlcª^s^fi^_ib crkafkdªfkªqebªcfk^k`fîªpvpqbjªtefèª`lriaª_bªobafpqof_rqbaªqlªqelpbªtelªkbbaªfq jlpq+ªªTebkªifnrfafqvªaofbpªrm)ªfqªafp^mmbôpªîqldbqeboªo^qeboªqe^kª_bfkdªob*îil * `^qbaªbipbtebob+ªTebkªe^fo `rqpªofpb)ªîiª_î^k`bªpebbqpªpeofkhªfkªrkfplk+ªQerp) qebobªfpª^ªdbkboîfwbaªabìfkbªfkªqebªtfiifkdkbppªqlªibka+ªTebkª^ª_^khªprèª^p KloqebokªOl`hªcfkapªfqpbicª^qªqebªob`bfsfkdªbkaªlcª^ªorkª_vªfqpªòbafqlop)ªfqª`^kklq pfjmivªqrokªqlª^klqeboªòbafqloªqlªq^hbªrmªqebªpi^`h)ªcloªîiªlqeboªòbafqlopªôb pfjriq^kblrpivª`roq^fifkdªqebfoªibkafkd+ªFkªqefpªpbkpb)ªifnrfafqvªpelriaª_bªrkabo * pqllaªfkªqbojpªlcªqebªdoltqeªlcª_î^k`bªpebbqpª%f+b+ª^pª^ªcilt&)ªo^qeboªqe^kª^pª^ pql`h+ Geneva11_latest.qxp 07/05/2009 16:48 Page 24 Geneva11_latest.qxp 07/05/2009 16:48 Page 25

3 Who Should be Regulated (by Whom)?

Fkª@e^mqboª/ªtbªmolsfabaª^ªqeblobqf`îªclrka^qflkpªcloªqebªobdri^qflkªlcªcfk^k`fî cfojpª_vªlrqifkfkdª^kªrkaboivfkdªjbè^kfpjªtefèªibâpªbkaldbklrpivªqlªcfk^k * `fîªfkpq^_fifqv+ªQebªcfopqªnrbpqflkªlkbªe^pªqlªâaobppªfp7ªTelªpelriaª_bªobdri^qba< Pfk`bª^kvªbccb`qfsbªobdri^qflkªclo `bpªcfojpªqlªabsf^qbªcoljªqebfoªmobcboobaªlmqflk) qebvªît^vpªe^sbª^kªfk`bkqfsbªqlªjlsbªqebfoª_rpfkbppªlrqpfabªqebª_lrkaôvªlcªobd* ri^qflk+ªFqªfpªqebkªklªpromofpbªqe^qªqebªâsbopbªjbè^kfpjªabpòf_baªfkª@e^mqboª/ ob^mmbôpªfkªqebªrkobdri^qbaªpb`qlo )ªtefèª`îipªqebkªcloªdlsbokjbkqªprmmloq tebkª^ªòfpfpªefqp+ª@ljjbo `fîª_^khpªpbqqfkdªrmª^ppl`f^qbaª`lkarfqp)ªPFSpª^ka ebadbªcrkapªfkªqebªi^pqªòbafqª_r__ibªfpª^ªsfsfaªobjfkaboªlcªqefpª]_lrkaô vªmol_* ibj$)ªtefèªfpªafp`rppbaªfkªcroqeboªabq^fiªfkª>mmbkafuª>+ Fkªqefpªpb`qflkªtbªmolmlpbªpljbªdrfafkdªmofk`fmibpªlkªqebªp`lmbªlcªobdri^qflk) _bclobªbjme^pfwfkdªqebªfjmloq^k`bªlcª`lrkqbo*`vìf`îªcfk^k`fîªobdri^qflk %@e^mqboª1&ª^kaªifnrfafqvª^kaªj^qrofqvªjfpj^qèbpª%@e^mqboª2&+ª

3.1 Classification of Financial Institutions based on Objective Risk-Spillover Measures

Cfopq)ªqebªì^ppfcf`^qflkªlcªcfk^k`fîªfkpqfqrqflkpªpelriaª_bª_^pbaªlkªl_gb`qfsbªofph jb^probpªqe^qª`^mqrobªqebªofph*pmfiilsbopªcoljªlkbªfkpqfqrqflkªqlªqebªkbuq+ªQefpªfp bpmb`fîivªfjmloq^kqªcloªj^òl*morabkqfîªobdri^qflk+ª>kvªcfk^k`fîªfkpqfqrqflk qe^qªfpªpr_gb`qªqlªpvpqbjf`ªofph)ªklqªlkivª_^khpª_rqªîplªlqeboªfkqbo `lkkb`qba cfk^k`fîªmi^vbop)ªifhbªjlkl*ifkbªfkprobop)ªfkpro^k`bª`ljm^kfbpª%ifhbª>FDªtefè qrokªlrqªqlª_bªiôdb*p`îbªpbiibopªlcªòbafqªabc^riq*pt^mp&)ªpelriaª_bª`lsbobaª_vªobd* ri^qflk+ªQebªc^riqªifkbªlcªobdri^qflkªpelriaª_bªmofjôfivªabqbojfkbaª_vªqebªfkpqf * qrqflkÖpª^`qflkpª^kaª^ppbq*if^_fifqvªpqor`qrob)ªtefibªfqpªibdîªfabkqfqvª^pª_^kh)ªfkpro * ^k`bª`ljm^kv)ªPFSªbq`+ªpelriaªlkivªmi^vª^ªpb`lkaô vªolib+ª >jlkdªlqebop)ª@lSÔªfpªlkbªprèªpmfiilsboªofphªjb^prob+ªCloªlqeboªpro sbvpªlc pvpqbjf`ªofph)ªpbbªAbª?^kaqª^kaªEôqj^kkª%/---&ª^kaªCbodrplk)ªbqªî+ª%/--4&+ªFq nr^kqfcfbpªeltªcfk^k`fîªafccf`riqfbpªlcªlkbªfkpqfqrqflkª`^kªfkòb^pbªqebªq^fiªofphªlc lqebop+/2 Rkifhbªqebªqvmf`îªSîrb*^q*Ofphª%SÔ&ªjb^prob)ªtefèª`^mqrobpªqebªofphªlc ^ªpfkdibªfkpqfqrqflk)ª@lS Ôª`^mqrobpªqebªifkhpª^òlppªpbsboîªfkpqfqrqflkp+ªJlob pmb`fcf`îiv)ª_^khªUÖpª@lSÔªfpªqebª`lkafqflkîªSÔªlcª_^khªUÖpª`lrkqbomôqvªloªqeb telibªcfk^k`fîªpb`qloª^cqboª`lkafqflkfkdªqe^qª_^khªUªfpªfkªafccf`riqv +/3 Fkªmôqf`r* iô)ªfcª_^khªUª`^rpbpªpljbªofphªpmfiilsbopªlkªfqpª`lrkqbomôqfbp)ªqebkªqebª@lS Ô bu`bbapªqebªrk`lkafqflkîªS Ô+ªPrèª^ªofphªpmfiilsboªjb^probªpelriaª_bªprmmib *

25 Geneva11_latest.qxp 07/05/2009 16:48 Page 26

26 The Fundamental Principles of Financial Regulation

jbkqbaªtfqeªpqobppªqbpqpªp`bkôflp+ Qebªofph*pmfiilsboªlcª^ªcfk^k`fîªmi^vboª`^kª_bªefdeªfcªfqª%f&ª `^rpbp cfk^k`fîªafccf* `riqfbpª^qªlqeboªfkpqfqrqflkpªloªfqªfpª%ff&ª pfjmiv `loobi^qba tfqeªcfk^k`fîªafccf`riqfbp ^jlkdpqªlqeboªcfk^k`fîªfkpqfqrqflkp+ª>ªdllaªofph*pmfiilsboªjb^probªpelriaªbk`lj* m^ppª_lqeªè^kkbip)ª_rqªqefpªafpqfk`qflkpªebimpªrpªqlªdolrmªcfk^k`fîªfkpqfqrqflkp ^p7ª

.+ª]Fkafsfarîivªpvpqbjf`$ Qebpbªfkpqfqrqflkpª`^rpbªofphªpmfiilsbopª^kaªfkìrabªfkpqfqrqflkpªqe^qªôbªplªiôdb) plªj^ppfsbivªfkqbo`lkkb`qba)ª^kaªplªf`lkf`ª^pªôk^qflkîªè^jmflkpÖªqe^qªklªdls* bokjbkqªtlriaªbsboªîiltªqebjªqlªc^fi+ªQebvªobnrfobªj^òl*morabkqfîªobdri^ * qflkª^kaªîplªjfòl*morabkqfîªobdri^qflkª%b+d+ªPlisbk`vªFF&ªarbªqlªqebfoªpfwb+

/+ª]Pvpqbjf`ª^pªmôqªlcª^ªeboa$ª%b+d+)ªefdeivªibsbobaªebadbªcrkap& Qebpbªj^vª_bªprccf`fbkqivªpjîi)ª^kaªfkpfdkfcf`^kq)ªcloªqebfoªfkafsfarî `lkafqflk klqªqlª_bªlcªdob^qª`lk`bokªqlªqebª^rqelofqfbp)ªmôqf`riôivªtebkªqefpªfpªaofsbkªmof* jôfivª_vªfaflpvkò^qf`ªc^`qlop)ª_rqªtebkªqebvªjlsbªqldbqeboª^pªmôqªlcª^ªiôdbo dolrm)ªqebfoª`loobi^qbaªcir`qr^qflkpªj^vªtbiiª_bªpvpqbjf`+ªEbk`b)ªqebvªobnrfob pljbªj^òl*morabkqfîªobdri^qflkª_rqªsbovªifjfqbaªjfòl*morabkqfîªobdri^qflk tefèªjfdeq)ªfkªqebª`^pbªlcªebadbªcrkap)ª_bªbub`rqbaªsf^ªqebfoªmofjb*_olhbop+ /4

0+ªKlk*pvpqbjf`ªiôdb ^kaªklqªefdeivªibsboba %b+d+)ªFkpro^k`bª@ljm^kfbpª^ka Mbkpflkªcrkap& Qebpbªfkpqfqrqflkpªkbbaªcriiªjfòl*morabkqfîªobdri^qflk)ª_rqªklªâafqflkî j^òl*morabkqfîªobdri^qflk+

1+ªQfkfbp) bpmb`fîivªfcªqebvªôbªrkibsboba)ªpelriaªe^sbªjfkfjîª`lkar`qªlc _rpfkbppªobdri^qflkp+

Qebªofph*pmfiilsboªjb^probªpelriaªabqbojfkbªtebqeboª^ªcfojªkbbapªj^òl*morabk* qfîªobdri^qflkª%dolrmª.ª^kaª/&ªloªklqª%dolrmª0ª^kaª1&ª^kaªfkcirbk`bªqebªbuqbkqªlc qebª`^mfqîª^kaªifnrfafqvªèôdbp+ªCloªbu^jmib)ª^kªfkpro^k`bª`ljm^kvªifhbª>FD qe^qªpbiipªòbafqªabc^riqªpt^mpª%@AP&ªlkª^ªiôdbªp`îbª_bilkdpªqlªdolrmª.ªfkpqbâªlc 0+ª B^èªvbô)ª^kaªlkªqebªl``^pflkªlcªb^èªj^gloªjôhbqªbsbkq)ªqebªobibs^kqªobdr * i^qlopª^kaªprmbosfplopªpelria)ª^pª^ªj^qqboªlcª`lropb)ªao^tªrmª^ªifpqªlcªtefèªcfk^k* `fîªfkpqfqrqflkpªqebvª`lkpfaboªqlª_bªÖpvpqbjf`Ö)ª^kaªpeôbªprèªfkcloj^qflkªtfqe lqeboªprmbosfplop+ >qªlkbªpq^dbªtbªmolmlpbaªqe^qªqebªobdri^qlop,prmbo sfplopªpelriaªmr_ifpeªqe^q ifpq)ªfkªloaboªqlªbke^k`bªqebªafp`fmifkbªqe^qªtlriaªfjmlpbªlkªobdri^qlop,prmbo sf* plopªqlªalªqefpªbubo `fpbª`ôbcriiv+ª?rqªtbªe^sbª_bbkªmboprâbaªqe^qªqebªafpâs^k * q^dbpªlcªqe^qª`lropbªlrqtbfdeªqebªâs^kq^dbp+ªKlqªlkivªfpªqebª`lk`bmqªlcªÖpvpqbjf`Ö crwwvª^kaªpq^qb*`lkqfkdbkq)ª_rqªîplªfqª`lriaªibâªqlªjloîªe^wôaª^kaªqlªôqfcf`fî _be^sflroª^jlkdªqebªobdri^qbaªfkªqebfoª^qqbjmqªqlª^èfbsbªqebfoªabpfobaªpq^qrp8 qefpªj^vªobmobpbkqª^ª`^pbªcloªÖ`lkpqor`qfsbª^j_fdrfqvÖ+ /5 Geneva11_latest.qxp 07/05/2009 16:48 Page 27

Who Should be Regulated (by Whom)? 27

3.2. Rules for Individually Systemic Institutions

Ibqªrpªobsboqªqlªfkpqfqrqflkpªqe^qªôbªfkafsfarîivªpvpqbjf`+ªQebobªpelriaª_bªpboflrp `lk`bokª^_lrqªîiltfkdª^kv lcªqebjªfkafsfarîivªqlªdbqªfkqlªqolr_ib+ªQe^qªjb^kp qe^qªjfòl*morabkqfîªobdri^qflkª^kaªprmbosfpflkªobj^fkªobibs^kq+ªQebªbpq^_ifpeba clojªlcªprèªjfòl*morabkqfîªobdri^qflkªcloª_^khpªobj^fkpª?^pbiªFF+ªT bªâsl`^qb qe^qªqefpª`lkqfkrbpªqlª_bª^mmifba)ª^pªlofdfkîivªmolmlpba)ªqlªiôdbªpvpqbjf`)ªfkqbo * k^qflkîª_^khp)ª^kaªqe^qªqebª^mmolmof^qbªjfòl*morabkqfîª`lkqolipª`lkqfkrbªîpl qlª_bª^mmifbaªqlªiôdbªrkibsbobaªfkpqfqrqflkp+ Qefpªfpªklqªqlªp^vªqe^qªqebªjbqelapªcloª^ppbppfkdªofph*tbfdeqbaª^ppbqpª%OT>p&ªal klqªkbbaªobcloj8ªqebvªal+ª>pªe^pª_bbkªbubjmifcfbaªqeolrdelrqªqebª`roobkqªcfk^k * `fîªòfpfp)ªqebªofphpªqlª^ª_^khÖpªifnrfafqvª^kaª`^mfqîªôfpbªfkªiôdbªmôqªcoljªqe^q _^khÖpªlcc*_î^k`b*pebbqªbumlprobpª^kaª`lkqfkdbkqªif^_fifqfbp)ªb+d+)ªfkª_^`h*rmªifkbp lcªòbafqªqlª`lkkb`qbaª`lkarfqp)ªPMSp)ªPFSp)ªbq`+)ª^kaªfkªabofs^qfsbªjôhbqp+ªQeb ?^pbiª@ljjfqqbbªe^pªalkbªdllaªtloh)ªtefèªkbbapªqlª_bªbuqbkabaªcroqeboªklt ) fkª^ppbppfkdªeltªprèª`lkqfkdbkqª`ljjfqjbkqpªpelriaª_bªfk`lomlo^qbaªfkql jb^probpªlcªOT>p+ Jloblsbo)ªòbafqªo^qfkdp)ªtebqeboª_vª@O>pªloª_vªqebª_^khpªqebjpbisbp)ªôbª^ jb^probªlcªbumb`qbaªilpp)ªklqªlcªrkbumb`qbaªilpp+ªCloªqebªi^qqbo)ªte^qªlkbªkbbapªfp pljbªbpqfj^qbªlcªqebªifhbifellaªlcªaltktôapªo^qfkdªjfdo^qflk)ª^kaªlcªqebªobpriq* fkdªp`îbªlcªilppªfkªqe^qªbsbkq7ª^ªafccf`riqªbubo `fpb)ª_rqªklqªfjmlppf_ib+ /6 Jlobª^qqbkqflkªpelriaªîplª_bªdfsbkªqlªafsbopfcf`^qflk)ª_rqª`ôbªpelriaª_bªdfsbk qlªafpqfkdrfpefkdª_bqtbbkªfaflpvkò^qf`ª^kaªpvpqbjf`ªafsbopfcf`^qflk+ 0- >ª_^kh tefèª`lk`bkqo^qbp)ªcloªbu^jmib)ªqlqîivªlkªil^kpªqlª^ªmôqf`riôª`^qbdlo vªlcª_lo* oltbopªfkª^ªmôqf`riôªobdflkªe^pªklªfaflpvkò^qf`ªafsbopfcf`^qflk8ªf+b+)ªfqªfpªpr_gb`q qlª`boq^fkªl_sflrpªofphp)ª%f+b+ªfcªabj^kaªcloªprèª_looltbopÖªmolar`qpªabìfkbp&+ Eltbsbo)ª_bfkdªrkifhbªjlpqªlqeboª_^khp)ªfqªfpªibppªifhbivªqlª`^rpbª`lkq^dflk)ªlo pmfii*lsboªofphp)ªpelriaªfqªc^fi+ªPrèª^ª_^khªfp)ªqebobclob)ªibppªa^kdbolrpªqlªqebªpvp * qbjª^pª^ªtelib)ª^kaªkbbapªklªmôqf`riôªbuqo^ªj^òl*morabkqfîªobdri^qflk+ªFqª`^k j^hbªfqpªltkªèlf`bp)ªtfqelrqªbuqbokîªmobpprob+ªFaflpvkò^qf`ª`lk`bkqo^qflkªalbp klqª`^rpbªpvpqbjf`ªpmfii*lsboªofph+ Oribpªpelriaªîplª_bªabpfdkbaªfkªprèª^ªt^vªqe^qª_^khpªe^sbªklªfk`bkqfsbªql jlsbª^ppbqpªfkqlªlcc*_î^k`bªpebbqpªsbefìbpª^kaª`lkarfqp+ª>pªlrqifkbaªfk ?orkkbojbfboª%/--6&ªrkaboªqebª`roobkqªpvpqbjª_^khpªeâª^kªfk`bkqfsbªqlªmôhª^ka afsbopfcvª^ppbqpªfkªlcc*_î^k`bªpebbqªsbefìbpªfkªloaboªqlªj^fkq^fkª^ªiltboª`^mfqî èôdb+0.

3.3. Rules for Institutions that are ‘Systemic in a Herd’

Tbªkltª`lkpfaboªqebªiôdboªkrj_boªlcªpjîiboªfkpqfqrqflkp)ªjlpqivªpjîiª_^khp) clobfdkª_o^kèbpª^kaªpr_pfafôfbp)ªjlpqªebadbªcrkap)ªmofs^qbªbnrfqv )ªbq`+)ªtelªôb klqªfkafsfarîivªpvpqbjf`)ª_rqªj^vª_b`ljbªplªtebkªqebvªjlsbªqldbqeboª^pª^ dolrmª%loªeboa&+ª@lkpfaboª^ªpvpqbjªlcª k afccbobkqª_^khp)ªtebobªb^èªe^pª^ªmloqcl * iflª`lkpfpqfkdªlcª^kªfabkqf`îªco^`qflkª%., k&ªlcªqebª^ddobd^qbªmloqclifl)ª%^ªobmobpbk * q^qfsbª_^khªpvpqbjªfkªbccb`q&+ªFcªlkbª_^khªc^fip)ªqebªifhbifellaªfpªqe^qªîiªtfii+ª>ªofph* pmfiilsboªjb^probªtlriaª`î`ri^qbªqebª^ddobd^qbª_^khªmloqcliflªfkªqebª`lrkqov)ª^ka qebkª`ljmrqbªeltªjrèªqebªfkafsfarîª_^khpÖªmloqcliflpª`loobi^qbªtfqeªqebª^ddob* Geneva11_latest.qxp 07/05/2009 16:48 Page 28

28 The Fundamental Principles of Financial Regulation

d^qb+ªQebªefdeboªprèª`loobi^qflk)ªqebªibppªafsbopfcfbaªqebªpvpqbj+ª>pªrprîªtfqeªofph ^ppbppjbkq)ª`l*sôf^k`bªfpªjlobªfjmloq^kqªqe^kªsôf^k`b+ªPfk`bªtbªcl`rpªlkª%ibcq& q^fi*bsbkqp)ª`l*ofphªjb^probpªôbªprmbofloªqlªpfjmibª`lsôf^k`bªjb^probp+ª Qebªmol_ibjªtfqeª?^pbiªFFªt^pªklqªplªjrèªqe^qªfqªt^pª^kªfk`loob`qªjbqof`ªlc jfòl*morabkqfîªofphª%qelrde)ªlcª`lropb)ªfqªt^pªqlªpljbªbuqbkq&)ª_rqªqe^qªfqªqllh fkprccf`fbkqª^``lrkqªlcªj^òl*morabkqfîªofph)ª^pªpbqªlrqª^kaªôdrbaªfkª@e^mqboª/+ Tbªôdrbªqe^qª_bqqboªjb^probpªlcªj^òl*morabkqfîªofphªôbªqlª_bªclrkaªfkªibsbo^db o^qflp)ªj^qrofqvªjfpj^qèbpª^kaªbpqfj^qbpªlcª_^khªòbafqªbum^kpflkª^kaª^ppbq mof`bªbum^kpflkp+ª Qefpªdolrmªfpª`roobkqivªafsfabaªfkªfqpªsfbtªeltªqlªobdri^qbªqefpªdolrmªlcªcfk^k * `fîªfkpqfqrqflkpªcloªjfòl*morabkqfîªmromlpbp+ªLkbªsfbtªfpªqe^qªqefpªtfaboªo^kdb lcª%fkafsfarîivªklk*pvpqbjf`&ªfkqbojbafôfbpªpelriaªpqfiiª_bªpr_gb`qªqlªfkafsfarî jfòl*morabkqfîªobdri^qflk+ª@lkqoliifkdªqebfoªfkafsfarîª^pprjmqflkªlcªofph obj^fkp)ªlkªqefpªsfbt )ª_lqeª^ªabpfo^_ibª^kaª^mmolmof^qbªcrk`qflkªlcªobdri^qflk, prmbosfpflk+ªFcªprèªjfòl*morabkqfîªprmbo sfpflkªfpªfkªclo`b)ªqebkªqebªj^òl*mor* abkqfîªc^`qlopª`^kª_bªfkqbo^`qbaªtfqeªqebjªîlkdªbu^`qivªqebªp^jbªifkbp)ª^pªtb molmlpbªfkªqebªcliiltfkdªè^mqbopªcloªpvpqbjf`ªfkpqfqrqflkp+ª Qebªlqeboªsfbtªfpªqe^q)ªfcª^kªfkpqfqrqflkªfpªklqªfqpbicªÖpvpqbjf`Ö)ªqebobªôbªklªqeb * lobqf`îªdolrkapªcloªbuqbokîªfkqbocbobk`bªfkªfqpªltkªèlpbkªofphªmolcfib8ªpl)ªlkªqefp sfbt)ªqebobªtlriaª_bªklªkbbaªcloª^kv jfòl*morabkqfîªobdri^qflk+ªFkpqbâ)ªîiªqe^q tlriaª_bªobnrfobaªtlriaª_bªpljbªpfjmifcfbaªj^òl*morabkqfîªobnrfobjbkqp) obi^qfkdª`lobª`^mfqîªqlªibsbo^dbª^ka)ªmboe^mp)ªqebªfkqbojbafô vÖpªo^qbªlcª^ppbq bum^kpflkª%doltqe&+ Mboe^mpªb^èª`lrkqovÖpªobdri^qlop,prmbosfplopª`lriaªèllpbª_bqtbbkªqebpbªîqbo* k^qfsbp)ªtefèª`lriaªîplªafccboª_bqtbbkªqvmbpªlcªfkqbojbafôfbp)ªqerpª_^khpª`lria _bªqob^qbaªafccbobkqivªcoljªebadbªcrkap+

3.4. International Considerations for International Entities

Qvmf`îivªlkbªlcªqebªdob^qbpqª`lk`bokpª^jlkdpqª_lqeª_^khpª^kaªmlifqf`f^kpªobi^qbp klqªplªjrèªqlª`ljmbqfqfsbªfkbnrîfqfbpª^jlkdpqª^kaª_bqtbbkªaljbpqf`ª_^khp) _rqªqelpbª_bqtbbkªaljbpqf`ªltkbaª_^khpª^kaªpr_pfafôfbpª^kaª_o^kèbpªlcªclobfdk _^khp+ªLroªmofk`fmibªfpªqe^qªqebª`lrkqo vªloªbkqfqvªqe^qª_bôpªqebª_roabkªfkª`^pbªlc ^ª_^filrqªlcª^ªcfk^k`fîªfkpqfqrqflkªpelriaªîplª_bªfkªèôdbªlcªobdri^qfkdªqe^q cfk^k`fîªfkpqfqrqflk+ªEbk`b)ªtbªtlriaªprddbpqªqe^qª^kvª_o^kèª%lcªclobfdk*ltkba& _^khpªabpfdk^qbaª^pªÖpvpqbjf`Öª_vª^ªelpqª`lrkqovªpelriaª^rqlj^qf`îivª_bªobnrfoba qlªè^kdbªfqpªpq^qrpªqlª_bfkdª^ªpbmô^qbivª`^mfqîfpbaªpr_pfafô v+ªQebkªbu^`qivªqeb p^jbª`^mfqîª^kaªifnrfafqvªâbnr^`vªobnrfobjbkqª`î`ri^qflkpªtlriaª^mmivªqlªclo * bfdk*ltkbaªpvpqbjf` pr_pfafôfbp0/ ^pªqlªaljbpqf`ª_^khpª+ª >pª^ª`lkpbnrbk`b)ªfcª^ª_^khªpelriaªèllpbªqlªlmbkª_o^kèbp,pr_pfafôfbpªfkª^ clobfdkª`lrkqovªqe^qªôbªiôdbªbklrdeªqlª_bªabcfkbaª_vªqe^qªelpqª`lrkqo vª^pªÖpvp* qbjf`Ö)ªqebkªfqªtfiiªe^sbªqlªeliaª^ªpbmô^qbªmlqªlcª`^mfqîªfkªqe^qª`lrkqo v)ª^``loa* fkdªqlªqebªelpqª`lrkqo vÖpª`î`ri^qflkp+ªQe^qªtfiiªobar`bªqebªpvkbodfbpªlcªòlpp*_lo * aboª_^khfkd+ªFqªîplªo^fpbpªqebªnrbpqflkªlcªtebqeboª%^kaªeltªcô&ªprèªpbmô^qbªmlqp pelria,`lriaªdlªqlªp^qfpcvªqebª@>Oªlcªqebª`lkplifa^qbaª_^kh+ªLroªsfbtªfpªqe^qªobd* ri^qlop,prmbosfplopªôbªmofjôfivª`lk`bokbaª^_lrqª`lkafqflkpªfkªqebfoªltkª`lrk * qofbpª%^pªe^pª`boq^fkivª^mmbôbaªqlª_bªqebª`^pbªfkªmo^`qf`bªfkªqebª`roobkqªòfpfp&+ªFc Geneva11_latest.qxp 07/05/2009 16:48 Page 29

Who Should be Regulated (by Whom)? 29

pl)ªqebªeljbªobdri^qloªtlriaªobi^qbªqebª@>OªqlªqebªO T>,Ibsbo^dbªo^qflªfkªqeb eljbª`lrkqovªmirpªqebªÖklk*pvpqbjf`Öª_o^kèbp,pr_pfafôfbpªfkªlqeboª`lrkqofbp+ªTb obîfpbªqe^qªqefpªtlriaª_bªrkmf`hfkdª^ªmôqªlcªqebªmofloªmofk`fmibªlcª`lkplifa^qflk lkªqebªeljbªobdri^qlo+ª Tbªtlriaªbk`lro^dbª^ªjlobªBrolmb^kª^mmol^èªtfqefkªqebªbrolªôb^+ªFcª_roabk peôfkdª`lriaª_bª^dobbaªrmlk)ªobdri^qflkª`lriaª_bªqo^kpcboobaªqlª^ªBrolmb^kªfkpqf* qrqflk+ Geneva11_latest.qxp 07/05/2009 16:48 Page 30 Geneva11_latest.qxp 07/05/2009 16:48 Page 31

4 Counter-cyclical Regulation

Fkª@e^mqbopª.ª^kaª/)ªtbªklqbaªqebªmol*`vìf`îfqvªqe^qªcliiltpªcoljª_^khpªè^pfkd obqrokpªlkªbnrfqv)ªj^fkq^fkfkdªsîrbª^qªofph)ª^kaªrpfkdªjôh*ql*jôhbqªsîr^qflk ^kaªofphª^mmol^èbp+ªTbªîplªefdeifdeqbaªqebªpr_pq^kqfîªofphpªcloªqebªcfk^k`fîª^ka b`lkljf`ªpvpqbjªtebkªqebª`vìbªqrokpªaltk+ªFkªqefpª@e^mqboª^kaªqebªkbuq)ªtb abpòf_bªeltª`lrkqbo*`vìf`îªobdri^qflkªj^vª_bªmrqªfkªmi^`b+ªQebobªôbªqtlªj^fk pqo^kapªlcªcfk^k`fîªobdri^qflk)ªlkbªlkª`^mfqîª^kaªlkbªlkªifnrfafqv +ªTbªafp`rpp `^mfqîªobdri^qflkªfkªqefpªpb`qflkª^kaªkbtª^mmol^èbpªqlªqebªobdri^qflkªlcªifnrfa * fqvªfkª@e^mqboª2+ªQebªj^fkªmofk`fmibpªqe^qªtbªfkslhbªôb7

.+ Qebªj^fkªl_gb`qfsbªlcª`lrkqbo*`vìf`îªobdri^qflkªpelriaª_bªqlªobar`b qebªpvpqbjf`ªofphªqe^qªcir`qr^qflkpªfkªqebª`lkafqflkpªlcª^kªfkpqfqrqflk) loªjôhbq)ªtlriaªe^sbªlkªqebªobpqªlcªqebªpvpqbj+ªPvpqbjf`ªfkpqfqrqflkp %jôhbqp&ªpelriaª_bªobdri^qbaªfkªafob`qªmolmloqflkªqlªqebfoªpvpqbjf` ofph+ªQ lª^èfbsbªqefp)ª@>Opªôbªkbbabaªqe^qªôbª_^pbaªlkª_bqqboªofph pmfiilsboªjb^probpªqe^qªq^hbªibsbo^db)ªj^qrofqvªjfpj^qèª^kaªcfk^k`fkd fkqlª^``lrkq+ª /+ Qebªjb^probpªe^sbªqlª_bª`lrkqbo*`vìf`î)ªf+b+ªqlrdeªarofkdª^ªòbafq _lljª^kaªjlobªobiûbaªarofkdª^ªòfpfp+ªTbªmolmlpbª^ªiâabobaªobpmlkpb qlªbkprobª^ªmoljmqªobplirqflkªlcªbjbodfkdªmol_ibjpª_bclobªqebvª`^k pmfiiªlsboªqlªqebªtfaboªcfk^k`fîªpvpqbj+ 0+ Qlªbkprobªpqof`qªâebobk`bª^kaªfjmibjbkq^qflkªlcªprèªoribp)ªfqªfp fjmloq^kqªqlªmrqª^kªfk`bkqfsbªpqor`qrobªcloªobdri^qlopªfkªmi^`bª^kaªdrô* ^kqbbªqebfoªfkabmbkabk`bªcoljªmlifqf`îª^kaªil__vfkdªmobpprob+

4.1 Focus on Systemic Risk Spillovers

@^mfqîªèôdbpªpelriaªcl`rpªlkªqebªofphªpmfiilsbopª^kªfkpqfqrqflkª`^rpbp)ªloªfpª`lo * obi^qbaªtfqe)ªo^qeboªqe^kªpfjmivªqebªfkpqfqrqflkÖpªfkafsfarîªofph+ª>pªklqbaªbôifbo ) `roobkqªobnrfobaªjfkfjrjª`^mfqîªâbnr^`vªo^qflpªmolsfabªsbo vªifqqibªobpfifbk`b ^kaªprmmloqªqlªqebªpvpqbj+ªBsbkªpl)ªtbªpqfiiªâsl`^qbª^ªilt)ªcfubaªjfkfjrjªibsbo* ^dbªo^qflªcloª`^mfqî)ªklqª^pª^ªmolqb`qflkªcloªqebªobdri^qbaª_^khp)ª_rqª^pª^ªmolqb` * qflkªcloªqebªabmlpfqªfkpro^k`bªcrkaª%AFC&ª^kaªqebªqûm^vbo )ª^kaª^pª^ªqofddboªclo moljmqª`loob`qfsbª^`qflk+ªQefpª`lriaª_bªpbqª^pª^ªiltªmbo `bkq^dbªlcªqlqîª_î^k`b* pebbqª^ppbqpª^kaª^ªiltªifnrfafqvªofphªjb^probª%^pªlrqifkbaªfkª@e^mqboª2&+ªPfk`bªqeb l_gb`qfsbªebobªfpª^ªpfjmibªmolqb`qflkªcloªqebªAFC)ª^ªibsbo^dbªo^qflªtlriaªpbbjªjlob

31 Geneva11_latest.qxp 07/05/2009 16:48 Page 32

32 The Fundamental Principles of Financial Regulation

^mmolmof^qbªqe^kª^ªO T>ª_^pfp)ª_rqªtbªôbªklqªcfubaªlkªqefpªsfbt +ªRkaboªCAF@F> %.66.&ªqefpªmbo `bkq^dbªt^pªpbqª^pª/")ªqelrdeªqebªôdrjbkqpªcloªèllpfkdªqefp o^qeboªqe^kª^klqeboªkrj_boªôbªklqªìbôª%^qªib^pqªqlªrp&+ªLsboîi)ªeltbsbo )ªqeb cl`rpªpelriaª_bªlkªofphªpmfiilsbopªqe^qªmlqbkqfîivªrkabojfkbªqebªcfk^k`fîªpvpqbj ^pª^ªtelib+ª

4.2 When to Look Out for Systemic Risk?

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4.3. Predicting institutions’ future systemic risk contributions

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Counter-cyclical Regulation 33

robp+ªQefpªtlriaªqofddboª^ªmol`vìf`îªjôdfkªpmfoîª^pªabpòf_baªfkª@e^mqboª/+ Ebk`b)ªtbªmolmlpbªqe^qªèôdbpªpelriaªklqª_bªafob`qivª_^pbaªlkªqebª`roobkqªsî * rbpªlcªpvpqbjf`ªofphªjb^probpªifhbª@lS Ô)ª_rqªo^qeboªlkªsôf^_ibpªqe^qªmobaf`q crqrobª@lSÔªsîrbp+ªPrèªsôf^_ibpªfkìrabªibsbo^db)ªj^qrofqvªjfpj^qè)ªfkqbo * `lkkb`qbakbppªjb^probpª^kaªbpqfj^qbpªlcª_^khªòbafqªbum^kpflk+ªQefpªjbqelaªlc obivfkdªlkªjlobªcobnrbkqivªl_pbosbaªsôf^_ibpªqe^qªmobaf`qªcrqrobª@lSÔªjb^probp klqªlkivªîiltpªcloª`lrkqbo `vìf`îªobdri^qflk)ª_rqªîplªebimpªqlªabqbojfkbªelt jrèªtbfdeqªlkbªpelriaªmrqªlkªb^èªlcªqebpbªsôf^_ibp+ªªLsboîi)ªqebª_^pf`ªmobj * fpbªfpªqe^qªfkpqfqrqflkpªqe^qª`^rpbªjlobªkbd^qfsbªbuqbokîfqfbpª%ofphªpmfiilsbop& pelriaªc^`bªefdeboªèôdbpª^kaªrpfkdªmobaf`qfsbª^kîvpfpªbkprobpª^ª`lrkqbo`vìf`î obdri^qflk+

4.4. How to Impose Charges

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34 The Fundamental Principles of Financial Regulation

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4.5. More on Bank Capital: Two Notions

Fkªqebªafp`rppflkªlcªtefèª?^pbiªFFªo^qflªqlªfkqbo^`qªtfqeªlroªj^òl*morabkqfî) `lrkqbo*`vìf`î)ª`lkqolip)ªfqªj^vªebimªqlªao^tª^ª`lk`bmqrîªafpqfk`qflkª_bqtbbk qtlªklqflkpªlcª_^khª`^mfqî+ªQebobªfp)ªcfopq)ªqebªklqflkªlcª_^khª`^mfqîª%fjmif`fqªfk qebª?^pbiª^mmol^è&ª^pª^ª_rccboª^d^fkpqªilppªqe^qªmolqb`qpªabmlpfqlop+ªRkaboªqefp cfopqªklqflkªlcª_^khª`^mfqî)ªev_ofaªì^fjpªprèª^pªmobcboobaªbnrfqvªloªpr_loafk^q * baªab_qªôbª`lrkqbaª^pª_^khª`^mfqî)ªpfk`bª_lqeªôbªì^fjpªqe^qªôbªgrkfloªqlªabmlp* fqlop+ªFkabba)ªrkaboªqebª?^pbiª`^mfqîª^``loa)ªpr_loafk^qbaªab_qª`lrkqpª^pªQ fboª/ `^mfqî+ Eltbsbo)ªqebobªfpª^ªpb`lka)ª`lkqo^pqfkdªklqflkªlcª_^khª`^mfqîª^pªqebªì^fjªebia _vªqebªltkbopªlcªqebª_^khªtelªe^sbª`lkqoliªlsboªqebª_^khÖpªlmbo^qflkp+ >odr^_iv)ªev_ofaªì^fjpªprèª^pªmobcboobaªpeôbpªloªpr_loafk^qbaªab_qªalªklq nrîfcvª^pª_^khª`^mfqîªrkaboªqefpªpb`lkaªklqflkªlcª_^khª`^mfqî)ª^pªqebvª`^kª_b pbbkª^pªgrkfloªclojpªlcªab_q+ªTebkªqebª_^khªe^pªqllªifqqibª`^mfqîªfkªqefpªpb`lka Geneva11_latest.qxp 07/05/2009 16:48 Page 35

Counter-cyclical Regulation 35

pbkpb)ªqebªltkbopÖªfk`bkqfsbpªobcib`qªqebfoªefdeivªibsbo^dbaª_î^k`bªpebbq+ªTebk c^`baªtfqeª^ªatfkaifkdªpq^hbªfkª^ªibsbo^dbaªbkqfqv )ªqebªltkbopªtfqeª`lkqoliªe^sb ifqqibªqlªilpb)ª^kaªbsbovqefkdªqlªd^fkª_vªbkd^dfkdªfkªofph*pefcqfkdª_bqpªlkªqebª_^kh+ Qebªfkòb^pbaªobmlªe^fo`rqªfjmlpbaª_vªqebª`^mfqîªjôhbqªarofkdªafpqobppªbmfplabp `lriaª_bªpbbkª^pªqebªfkòb^pbaªjôdfkªabj^kabaª_vªòbafqlopªfkªqebª`^mfqîªjô * hbqªqlªè^kdbaª`fo`rjpq^k`bp+ªª Qebªhbvªmlfkqªfpªqe^qªqebªobmlªe^fo `rqª^kaªqebªfjmifbaªjûfjrjªibsbo^dbªfpª^ `lkpqo^fkqªfjmlpbaª_vªqebª`^mfqîªjôhbq)ª^kaªobcib`qpªqebªqbojpªlkªtefèªòbaf * qlopªôbªtfiifkdªqlªibkaªqlªqelpbªtfqeª`lkqoliªlsboªqebªibsbo^dbaªbkqfqv +ªLkbªmi^r* pf_ibªè^kkbiªqeolrdeªtefèªqebª`lkpqo^fkqªlmbo^qbpªfpªqebªtfpeª_vªòbafqlopªql ^slfaª_bfkdªbj_olfibaªfkª^ªibkdqevª^kaª`lpqivª_^khormq`vªpbqqibjbkqª^cqboªqeb _looltboªe^pªabc^riqba+ªTebkª^ª_^khª_ob^èbpªqebªjûfjrjªibsbo^dbªo^qflªmbo * jfqqbaª_vªqebªjôhbq)ªqebª_^khªjrpqªq^hbªobjbafîª^`qflkªqlªobar`bªfqpªibsbo^db) loªc^`bª^ªorkª_vªfqpªòbafqlop+ªª KloqebokªOl`hÖpªabjfpbªfiirpqo^qbpªqebpbªfpprbpªpqôhiv +ªKloqebokªOl`hªt^pª^ efdeivªibsbo^dbaªfkpqfqrqflkªtebkª`lkpfabofkdªqebªibsbo^dbªlkª`ljjlkªbnrfqv+ªFqp efdeªibsbo^dbªjâbªfqªbpmb`fîivªsrikbo^_ibªqlª^ªabqboflo^qflkªfkªlsboîiªcrkafkd `lkafqflkpªcloªqebªcfk^k`fîªpvpqbjª^pª^ªtelib+ªPbbªCfdrobª4+ Cfdrobª4ªmilqpªqebªibsbo^dbªlcªKloqebokªOl`hªcoljªGrkbª.665ªqlªAb`bj_boª/--4) rpfkdªqeobbªafccbobkqªjb^probpªlcªbnrfqv +ª@ljjlkªbnrfqvªfpªqebªjlpqª_^pf`ªcloj lcªbnrfqvªåªfqªfpªqebªpq^hbªebiaª_vªqebªltkbopªlcªqebª_^khªtfqeªslqfkdªmltboª^ka ebk`bªtelªe^sbªqebªofdeqªqlªbubo `fpbª`lkqoliªlsboªqebª_^kh+ª]Peôbeliaboªbnrfqv$ fkªCfdrobª4ªfpªabcfkbaª^pª`ljjlkªbnrfqvªmirpªmobcboobaªpeôbp+ªCfkîiv)ª]qlqîªbnrf* qv$ªfkªCfdrobª4ªfpªpeôbeliaboªbnrfqvªmirpªpr_loafk^qbaªab_q)ª^ªì^ppªlcªab_qªqe^qªfp pbkfloªqlªqebª`ljjlkª^kaªmobcboobaªbnrfqv )ª_rqªtefèªfpªgrkfloªqlªlqeboªqvmbpªlc ab_qªq^hbkªlkª_vªqebª_^kh)ªfkìrafkdªabmlpfqp+ Northern Rock's Leverage Figure 7 Northern Rock’s leverate, JJuneune 11998998 - D –e cDecemberember 2007 2007

70 Leverage on total equity 60 Leverage on shareholder equity Leverage on common equity 50

10 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Source: Shin (2009) Geneva11_latest.qxp 07/05/2009 16:48 Page 36

36 The Fundamental Principles of Financial Regulation

Cfdrobª4ªpeltpªsbovªbumif`fqivªeltªfjmloq^kqªfqªfpªqlª`î`ri^qbªqebªibsbo^dbªo^qfl tfqeª`ljjlkªbnrfqvªfkªqebªabkljfk^qlo +ªIbsbo^dbª_^pbaªlkªqlqîªbnrfqvªòb^qbp qebªcîpbªfjmobppflkªqe^qªKloqebokªOl`hªjfdeqªe^sbªklªafccf`riqvªoliifkdªlsboªfqp peloq*qbojªcrkafkd+ª

4.6 Ladder of Responses

Tfqeªobdôapªqlªqebªpb`lkaªj^fkªmofk`fmib)ªqe^qªobdri^qflkªpelriaª_bªjlpqª`lk * pqo^fkfkdªarofkdªòbafqª_lljp)ªtbªmolmlpbª^ªmolmlpbª^ªmoljmqª^kaªiâaboba obpmlkpbªtebkª^ªcfk^k`fîªfkpqfqrqflkªsfli^qbpªlroªjrèªjlobªpqofkdbkqª`^mfqî ^kaªifnrfafqvªobnrfobjbkqpªpqôqfkdª^qª^kªbôifboªpq^db+ªT bªcliiltªqebªpr``bppcri fjmibjbkq^qflkªlcªiâabobaª^mmol^èªfkqolar`baª_vªqebªCAF@F>+ªCloªbu^jmib) tebkªqebª`^mfqîª^kaªifnrfafqvªobnrfobjbkqpªôb)ªp^vª."ª_biltªqôdbqªsîrb)ªprmbo* sfpflkª`lriaª_bªbke^k`ba+ªTebkªqebªqôdbqªfpªjfppbaª_vª/")ªqebªfkpqfqrqflkª`lria fkªâafqflkª_bªclo_faabkªqlªm^vªlrqªafsfabkapªloªj^hbªlqeboªclojpªlcªbnrfqvªm^v * lrqp+ª>ªjfppbaªqôdbqª_vª0"ªjfdeqªafpîiltª^kvª_lkrpªm^vjbkqpªqlªqebª@BLª^ka lqeboª_lôaªjbj_bop+ª>ªjfppª_vª1ª"ª`lriaªobnrfobªob`^mfqîfw^qflkªloªìlprobªtfqe* fkªqtlªjlkqep+ª

4.7 Forced Debt-Equity Conversion

Ob`^mfqîfp^qflkªlcª_^khpªfkªqfjbpªlcªòfpfpªfpªlcqbkªafccf`riqª_b`^rpbª_^khpªprccbo coljª^ªab_q*lsboe^kdªmol_ibj+ªKbtªfksbpqlopªôbªrktfiifkdªqlªfkgb`qªkbtªbnrfqv ) pfk`bªqebªmofjô vª_bkbcf`fôfbpªlcªfqªtlriaª_bªbufpqfkdªab_qªeliabopª^kaªklqªqeb _^khªfqpbic+ªQ lªlsbo`ljbªqefpªmol_ibj)ªtbªmolmlpbªqe^qªqebªobdri^qlopªe^sbªqeb ^rqelofqvªqlª`lksboqªprèªbufpqfkdªab_qª^pª`lrkqpª^pªqfboª.ª^kaªqfboª/ª`^mfqîªfkql bnrfqv+ªQebª^fjªlcªqefpªqlliªfpªîibsf^qbª^ªpvpqbjf`ªòfpfpª^ka)ªebk`b)ªfqªpelriaªlkiv _bªfkslhbaªtebkªqebªtelibªloªmôqªlcªqebªcfk^k`fîªpb`qloªfpªfkªafccf`riqv +ª

4.8 Clear Incentives for Regulators: Rules versus Discretion

Qebªqefoaªj^fkªmofk`fmibªqe^qªtbªmolmlpbªfpªqe^qªl_gb`qfsbªòfqbof^ª^kaªmob*pmb`f * cfbaªoribpªpelriaª_bªmrqªclo tôaªqlªdrô^kqbbªqe^qªcfk^k`fîªobdri^qflkªfpªpqof`qiv bkclo`ba+ªQlªbkprobªqe^qªqebªbkclo`bjbkqªlcªqebpbªoribpªfpªòbaf_ib)ªobdri^qlopªjrpq c^`bªqebªofdeqªfk`bkqfsbªpqor`qrob02 ^kaªbkglvª^ªabdobbªlcªfkabmbkabk`bªqe^qªîiltp qebjªqlªfjmlpbªmlqbkqfîivªrkmlmriôªpqbmp+ªTebkªbsbo vlkbªfpª`îifkdªcloªjlob obdri^qflk)ªb+d+)ª^pªklt)ªgrpqª^cqboª^ªòfpfp)ªfqªfpªklqªkbbabaª^qªîi)ªpfk`bª_^khªj^k * ^dbopªôbªqfjfaª^kaªofphª^sbopb+ªTebkªobdri^qflkªfp kbbaba)ªklªlkbªt^kqpªfq)ª_b`^rpb ^ppbqªmof`bpªôbªofpfkd)ªqebobªfpª^ª_llj)ªbsbo vlkbªfpªlmqfjfpqf`)ª^kaªobdri^qflkªgrpq dbqpªfkªqebªt^vª%pbbª>mmbkafuª>&+ª>ijlpqªbsbovªobdri^qlo,prmbosfploªtfiiªpbbhªjû* fjrjªafpòbqflk+ª?b`^rpbªlcªqebª^_lsbª`lkpfabo^qflkp)ªobdri^qflkªpelriaª_bª_^pba lkªmob*pbqªoribp8ªlqebotfpb)ªcbtªobdri^qlo,prmbosfplopªtfiiª^`qrîivªaôbªqlªc^`bªqeb lafrjªlcªqfdeqbkfkdªfkª_lljª`lkafqflkp+ªQebobªfpª^`qrîivªifqqibªqe^qªtbªôbªmol * mlpfkdªebobªqe^qªfkªmofk`fmibª^kaªfkªqeblo vª`lriaªklqªe^sbª_bbkª^``ljmifpeba Geneva11_latest.qxp 07/05/2009 16:48 Page 37

Counter-cyclical Regulation 37

rkaboªqebªafpòbqflkôvªMfiiôª/ªlcª?^pbiªFF+ªFkªmo^`qf`bªfqªt^pªklqªrpbaªqe^qªt^vª^q îi)ª^kaªmol_^_ivªkbsboªtlriaª_b+

4.9 Cross-country Considerations

@lrkqbo`vìf`îªjb^probpªpelriaª_bª^mmifbaªlkª^ª`lrkqo v*_v*`lrkqovª_^pfp)ªpfk`b `vìbpªôbªklqªfabkqf`îª^kaªj^qèfkdª^òlppªîiªmôqpªlcªqebªtloia+ªQerpªDboj^kv ^kaªFqîvªafaªklqªpeôbªfkªqebªelrpfkdª`vìbªqe^qª^ccb`qbaªRP>)ªRH)ªPm^fk)ªbq`+ @obafqªbum^kpflkªqllhªmi^`bª^qª^ªsbo vªafccbobkqªm^`bªfkªsôflrpª`lrkqofbp+ªPlªtb `^kklq)ª^kaªpelriaªklq)ª^pªvbqªqîhª^_lrqª^ªtloiaª`vìb+ªEltbsbo )ªcloª`boq^fk obdflkp)ªklq^_ivªqebªbrolªôb^)ª`lrkqofbpª`lriaª`lloafk^qbª`lrkqbo `vìf`îªjb^p* robpªlkª^ªtfaboªobdflkîª_^pfp+ªQerp)ªbsbkªqelrdeªqebª?^pbiªFFª_^pf`ª@>Opªôbªibsbi ^òlppª`lrkqofbp)ªqebª^`qrîªfkqbo^`qbaª`lrkqbo*`vìf`îª@>Opªtlriaª_b`ljbªefde * boªfkª`lrkqofbpªtfqeª^kª^ppbqª_lljª^kaªo^mfaªòbafqªbum^kpflk)ªqe^kªfkª`lrkqofbp klqªbuef_fqfkdªprèª`lkafqflkp+

4.10 Contrast to Spanish Dynamic Provision Mechanism

Fqªj^vª_bªtloqetefibª`ljmôfkdª^kaª`lkqo^pqfkdªlroª^mmol^èªtfqeªqe^qªlcªqeb Pm^kfpeªmob*ª%loªavk^jf`&ªmolsfpflkfkdªjbè^kfpj+ 03 Qebvªôbªìlpbivªpfjfiôªfk fkqbkqª^kaª`lkpqor`qflk+ª?lqeªrpbªj^òl*morabkqfîªjb^probpªqlªfkqbo^`qªtfqeªmor* abkqfîªobnrfobjbkqp+ªT bªmrqªjlobªtbfdeqªlkªibsbo^dbªo^qflpª^kaªj^qrofqvªjfp * j^qè804 qebªPm^kfpeªmrqªjlobªtbfdeqªlkªòbafqªdoltqeª%`ljmôbaªqlªilkdbo*qboj ^sbo^dbªsîrbp&8ª_lqeªtlriaª^mmivªkrjbof`îª`lbccf`fbkqp)ªtefèªe^sbª_bbkªmob* pbq)ªqlªâgrpqªmorabkqfîªobnrfobjbkqpªqlªqebªobibs^kqªfkafsfarîª_^khp)ªfkìrafkd pr_pfafôfbpªlcªclobfdkª_^khpªfkªPm^fk+ªQebªPm^kfpeªpèbjbªobi^qbpªplibivªqlªòbafq doltqeª^kaªmolsfpflkpªfkªPm^fk+ªGrpqª^pªfkªqebª`^pbªlcªlroªmolmlpîp)ªfcªqebªPm^kfpe pèbjbªtbobª^mmifbaªjlobªtfabivªqlªlqeboª`lrkqofbp)ªfqpª^mmif`^qflkªtlriaªafccbo coljª`lrkqovªqlª`lrkqovªabmbkafkdªlkªqebªpq^qbªlcªqebª`vìbªfkªb^èª`lrkqo v+ >ª`ljmif`^qflkªlcªqebªPm^kfpeªmob*molsfpflkfkdªpèbjbªfpªqe^qªfqª^mmbôpªqlªork clriªlcªqebª^``lrkq^kqpª^kaªlcªFCOPª%^kaªqebªqûª^rqelofqfbp<&+ª>ªafpâs^kq^dbªlc lroªmolmlpîªfpªqe^q)ª_vªfkqbo^`qfkdª%k^qflkî&ªj^òl*morabkqfîªc^`qlopªtfqeªqeb ?^pbiªFFª@>O)ªfqªbkapªqebªpfkdibªibsbi*mi^vfkd*cfbiaªcloªòlpp*_loaboª`^mfqîªobnrfob * jbkqpª^ka)ªtfqeªqe^q)ªqebªpfjmif`fqvªlcªebâ*nrôqboªj^k^dbjbkqª^kaªlcªlsboîi `lkplifa^qflk,`lkqoliª_vªqebªeljbªobdri^qlo,prmbosfplo+ªRkaboªlroªmolmlpîªebob jrèªjlobª`lkqoliªtlriaªciltª_^`hªqlªb^èª%pvpqbjf`&ªpr_pfafô vª^kaªqlªfqpªelpq obdri^qlo+ Tefibªtbª^mmi^raªqebªmofk`fmibpªlcªPm^kfpeªmob*molsfpflkfkd)ªtbªalªklqªqefkh qe^qªfqpªnr^kqfq^qfsbªbccb`qªe^pª_bbkªqlªjlabo^qbªqebªòbafqª`vìbª_vª^pªjrèª^pªlro jbè^kfpjª`lria+ªKbsboqebibppªpelriaªqebªmolmlpîªlrqifkbaªebobª_bªobdôabaª^p qllªoâf`î)ªqebªrkfsbopîªâlmqflkªlcªqebªPm^kfpeªmob*molsfpflkfkdªpèbjbª%^ka qebªâgrpqjbkqªlcªFCOPªqlªîiltªqe^qªqlªl``ro&ªtlriaªobmobpbkqª]`lrkqbo*`vìf`î* ifqb+$ Geneva11_latest.qxp 07/05/2009 16:48 Page 38

38 The Fundamental Principles of Financial Regulation

4.11 Conclusion

Qebªkbbaªfpªqlª^èfbsbª`lrkqbo*`vìf`îªobdri^qlo vªjbè^kfpj%p&+ªAbq^fipªlcªelt qefpªjfdeqª_bª^èfbsbaªôbªfjmloq^kq)ª_rqªpb`lkaô v+ªPljbªmo^`qfqflkbopªe^sb clrkaªlroªfkqbo*^`qfsbªmolmlpîpª`ljmibu)ª^kaªalr_qªtebqeboªqebpbª`lriaª_b jâbªlmbo^qflkî+ªFcªjlobªbccb`qfsbªîqbok^qfsbpª`lriaª_bªl_q^fkba)ªtbªtlriaª_b e^mmv+ª>pª@e^foj^kªAbkdªp^fa)ª]Qebª`lilroªlcªqebª`^qªfpªrkfjmloq^kq)ªplªilkdª^p fqª`^kª`^qèªjf`b+$ Geneva11_latest.qxp 07/05/2009 16:48 Page 39

5 Regulation of Liquidity and Maturity Mismatches

Tbªe^sbªôdrbaªfkªmobsflrpªè^mqbopªqe^qªqebª`roobkqªmefilplmevªlcª_^khfkdªobd * ri^qflkªåªqe^qªvlrª`^kªj^hbªqebªpvpqbjªp^cb 05 _vªj^hfkdªfkafsfarîªfkpqfqrqflkp p^cbªåªfpª^kªrkp^qfpc^`qlo vª_^pfpªcloªfkprofkdªpvpqbjf`ªpq^_fifqv +ªLkbªlcªqebªmofk`f * mîªob^plkpªcloªobdri^qfkdª_^khp)ªlsboª^kaª^_lsbªqebªt^vªtbªobdri^qbªlqeboª_rpf * kbppbp)ªfpªqe^qªqebfoªfkqbo*obi^qflkpefmpªôbªprèªqe^qªqebªo^qflkîªobpmlkpbªlcªlkb morabkqªfkpqfqrqflkªqlª^kªrkbumb`qbaªilppªåª^ªobar`qflkªfkªibkafkdª^kaª^ªpîbªlc ^ppbqpªåªj^vªe^sbªpvpqbjf`ªfjmif`^qflkpªcloªlqeboªmorabkqªfkpqfqrqflkp+ªQebpbªpvp * qbjf`ªfjmif`^qflkpªôbª`ljmlrkabaª_vªeboafkdª_be^sflroª^kaªqebªrpbªlcª`lk * qbjmlo^kblrpªmof`bpªfkªjb^probpªlcª^ppbqªsîrbª^kaªofph)ª^pªafp`rppbaªfkª@e^mqbo 0+06 Fkª@e^mqboª/ªtbªfkaf`^qbaªqe^q)ªtefibªqoâfqflkîªsfbtpªlcªpvpqbjf`ªofphªôb _^pbaªlkª`lkq^dflrpª_^khªc^firob)ª^ªhbvª^sbkrbªqeolrdeªtefèªpvpqbjf`ªofphªciltp qla^vªfpªsf^ªcrkafkdªifnrfafqvª`lj_fkbaªtfqeªâsbopbª^ppbqªmof`bªjlsbjbkqpªarb qlªiltªjôhbqªifnrfafqv +1- Cloªbu^jmib)ªfqªfpªtloqeªobfqbo^qfkdªqe^qªfkªqebª`^pbªlc KloqebokªOl`h)ªIbej^kª?olqebopª^kaª?bôªPqbôkp)ªqebªc^firobªt^pªmob`fmfq^qbaª_v qebªfk^_fifqvªlcªqebpbªcfojpª%f&ªqlªoliiªlsboªqebfoªif^_fifqfbpª%crkafkdªfiifnrfafqv&ª^ka %ff&ªqlªpbiiªjloqd^dbªmolar`qpª^qªklk*cfobªpîb*mof`bpª%jôhbqªfiifnrfafqv&)ªo^qebo qe^kªqebfoªcfkafkdªqe^qªqebfoª_looltbopªafaªklqªm^vªrmª%òbafqªofph&+ªJloblsbo )ªqeb cobbwfkdªlcªqebªfkqbo_^khªjôhbq)ªqebª^ppbqª_^`hbaª`ljjbo `fîªm^mboªjôhbq)ª^ka lqeboªplro`bpªlcªcrkafkdªt^pªjlobªpvpqbjf`ªqe^kªpmb`fcf`ªqlª`boq^fkªfkpqfqrqflkp+ª Qefpªè^mqboªpbbhpªqlªabsbilmª^ªobdri^qlovª^mmol^èªqlªifnrfafqvªqe^qªj^vªj^hb pvpqbjf`ªifnrfafqvªbsbkqpªibppªcobnrbkqªloªpbsbob+ªJlobªpmb`fcf`îiv)ªtbªmolmlpbªqeb cliiltfkdªqtlªjb^probp7

Mark-to-funding accounting rule Mllipªlcª^ppbqpªcloªtefèªilkd*qbojªcrkafkdªfpªpb`robaª`^kª_bªmrqªfkª^ª"elia*ql* crkafkdª^``lrkq"ªifkhbaªqlªqebªj^qrofqvªlcªqebªcrkafkdª^kaªalªklqªe^sbªqlª_b jôhba*ql*jôhbq+ªT bª_bifbsbªqefpªtfiiªebimªqlªobar`bªqebªjôhbqªfiifnrfafqv `^rpbaª_vª^ªclo `baªpîbªlcª^ppbqpªqe^qªe^pªklªlqeboªjlqfs^qflkªqe^kªqebªsîrb ^``lrkqfkdªpq^kaôa+ª

Explicit capital charge for liquidity risk Cfk^k`fîªfkpqfqrqflkpªtelªeliaª^ppbqpªtfqeªiltªjôhbqªifnrfafqvª^kaªilkd*j^qrof* qvª^kaªcrkaªqebjªtfqeªpeloq*j^qrofqvª^ppbqpªpelriaªfk`roª^ªefdeboª`^mfqîªèôdb+ Tbª_bifbsbªqefpªtfiiªfkqbokîfpbªqebªpvpqbjf`ªofphpªqebpbªjfp*j^qèbpª`^rpbª^ka

39 Geneva11_latest.qxp 07/05/2009 16:48 Page 40

40 The Fundamental Principles of Financial Regulation

fk`bkqfsbª_^khpªqlªobar`bªcrkafkdªifnrfafqvªofph+ªPmb`fîªbjme^pfpªpelriaª_bªdfsbk qlªqebªpvpqbjf`ª`ljmlkbkq)ªb+d+ªqlªqebªc^`qªqe^qªjôhbqªifnrfafqvª^qªqfjbpªlcªòfpfp fpªilt+

?bclobªbumi^fkfkdªqebªpmb`fcf`pªlcªqebpbªqtlªpbmô^qbª_rqªobi^qbaªmolmlpîp)ªtbªlrq* ifkbªtevªfqªfpªfkâbnr^qbªplibivªqlª`lkpfaboªqebªm^vlccªnrîfqvªlcª^ppbqpª^kaªbppbk * qfîªqlª`lkpfaboªifnrfafqvª^pmb`qp+

5.1 Focussing solely on Assets' Expected Payoffs is Insufficient

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5.2 Funding Liquidity and Maturity Mismatch

Qebªcfk^k`fîªpvpqbjÖpªobif^k`bªlkªpeloq*qbojªcrkafkdªlcªilkd*qbojª^ppbqpªtfqe mlqbkqfîivªiltªjôhbqªifnrfafqvªe^pª_bbkªqebªj^fkªplro`bªlcªfkpq^_fifqvªfkªqefpª^ka mobsflrpªcfk^k`fîªòfpbp+ªLkbªlcªqebªjlpqªòfqf`îªibpplkpªlcªqefpªòfpfpªfpªqe^q)ªtefib obdri^qlopªe^sbª_bbkªcl`rpbaªlkª^ppbqªnrîfqv)ªpvpqbjf`ªofphªe^pª^pªjrèªqlªalªtfqe eltª^ppbqpªôbªcrkaba+1/ Fcªqtlªfkpqfqrqflkpªe^sbªqebªp^jbª^ppbq)ª_rqªlkbªcrkapªtfqe ilkd*qbojªab_qª^kaªqebªlqeboª_vª_looltfkdªlsbokfdeqªcoljªqebªjlkbvªjôhbqp) qebobªfpª^ª^ªpr_pq^kqfîªafccbobk`bªqlªqebªmlqbkqfîªcloªpvpqbjf`ªofph+ªVbqª`roobkqªobd* ri^qlovªoribpªj^hbªifqqibªafpqfk`qflkª_bqtbbkªeltªqebªp^jbª^ppbqpªôbªcrkaba+ªQeb ^_pbk`bªlcªafpqfk`qflkªdfsbpª_^khpª^kªfk`bkqfsbªqlªcrkaª^ppbqpªpeloq*qboj+ªQefp fk`bkqfsbªfpªjlpqªmolklrk`baªtebkªqebªvfbiaª`ro sbªfpªrmtôaªpilmfkd)ª^pªfpªlcqbk qebª`^pbªfkª^ª_llj)ª^kaªpeloq*qbojªcrkafkdªfpªèb^mboªqe^kªilkd*qbojªcrkafkd+ Qebobªt^pª^ª`liib`qfsbªobif^k`bªlkªpeloq*qboj)ªtelibpîbªjôhbqªcrkapªfkªqebªork* rmªqlªqebª/--4ªò^pe+ 10 Fpªj^qrofqvªjfpj^qèª^kªfkbsfq^_ibªcb^qrobªlcª^ªmofs^qbª_^khfkdªpvpqbj<ª>cqbo îi)ªfpªklqª_^khfkdªîiª^_lrqª_looltfkdªpeloqª^kaªibkafkdªilkd<ªKlqªkb`bppôfiv + Qebobªôbªj^kvª`^sb^qpªqlªqe^qªdbkboîfw^qflk)ª^kaªfqªfpªîplª^ªj^qqboªlcªabdobb+ Pjîiª_rpfkbppªtfiiª`ljmi^fkªqe^q)ªdfsbkªqebªlkbolrpª`lsbk^kqpªlkª_^khªil^kp) qebvªalªklqªcbbiªqe^qªqebvªe^sbª_looltbaªilkd*qbojªcoljª_^khp+ª>kaªfqªfpªlcqbk p^faªqe^qªabmlpfqlopªôbªjlobªifhbivªqlªe^sbªafslo`baªqebfoªpmlrpbªqe^kªib^sbªqebfo _^kh+ªObq^fiªabj^kaªabmlpfqpªôbªklqª^pªfkpq^kqª^pªqebvª^mmbô +11 Qebªbsbo*abìfk* fkdªo^qflªlcªmofs^qbªpb`qloªaljbpqf`ªabmlpfqpªqlªqlqîªif^_fifqfbp)ª^pª_^khpªfkòb^p * fkdivªobifbaªlkªpeloq*qbojªtelibpîbªabmlpfqpªfkªqebªorkªrmªqlªqebªò^peªlcª/--4) Geneva11_latest.qxp 07/05/2009 16:48 Page 41

Regulation of Liquidity and Maturity Mismatches 41

t^pªlkbªjb^probªlcªfkòb^pfkdªcrkafkdªifnrfafqvªofphª^jlkdpqª_^khp+ªBccb`qfsbiv ) _^khpÖªj^qrofqvªjfpj^qèªdlqªtlopbªqeolrdeªtelibpîbªcfk^k`fkd+

5.3 Mark-to-Funding – A New Accounting Rule

Tbªmolmlpbª^ªkbtª^``lrkqfkdªoribªfkªloaboª%f&ªqlªobar`b)ªfkª^ªj^kkboªqe^qªfpªqorb qlªqebªb`lkljf`ªpfqr^qflkªlcªqebªcfoj)ªqebªmol`vìf`îfqvªtefèªjôh*ql*jôhbq fkar`bpªfkª^ppbqª_lljpª^kaª_rpqªarbªqlªqebª"ilppªpmfoî"+ªTbªôbª^pªjrèª`lk`bokba ^_lrqªqebªlsbo*bum^kpflkªfkª_lljpª^pª_vªqebªò^pebpªfkª_rpqp8ªfkabbaªqebªclojbo lcqbkª`^rpbpªqebªi^qqbo+ªEltbsbo)ªtbªôbªmôqf`riôivªtloofbaªqe^qªmof`bªabìfkbpªfk ^ªò^peªclo`bªfkpqfqrqflkpªtfqeªjbafrj*qbojªcrkafkdªloªif^_fifqfbpªqlªpbiiªqebjªfk loaboªqlª`ljmivªtfqeªmorabkqfîªofphªoribªcbaªlccªjôh*ql*jôhbqªsîr^qflkp)ªibâ * fkdªqlªcroqeboªmof`bªabìfkbpªqe^qªfkªqrokªclo`bªcroqeboªpîbp+ªTbªôbªîplª`lk`bokba qe^qª`lk`bokªlsboªjôh*ql*jôhbqªsli^qfifqvªhbbmpª_rvbopª^qª_^vªfkª^ªòfpfpªbsbk tebkª^ppbqpªôbªpbbkªqlª_bª"èb^m"+ªJôh*ql*jôhbqªsli^qfifqvªfpªefdeifdeqbaª^pªqeb j^fkªob^plkªtevªòbafqªfksbpqlopªôbªklqª_rvbopªlcªfkpqorjbkqpªqla^vªqe^qªe^sb _bbkªeb^sfivªjôhbaªaltkªfkªmof`b+ªJloblsbo)ªfqªpbbjpªqlªrpªqe^qªtebobª^ppbqpªôb _^`hbaªtfqeªilkd*qbojªcrkafkd)ª^mmivfkdª^kaªobpmlkafkdªqlªjôh*ql*jôhbqªsîrb ^``lrkqfkd)ªnrfqbª^môqªcoljªqebªpvpqbjf`ªfjmif`^qflkpªabpòf_baª^_lsb)ªfpªklqªfk qebªmorabkqfîªfkqbobpqpªlcªqebªcfoj+ª Tbªôbªrk`ljcloq^_ibªtfqeª^kvª^qqbjmqªqlªjlsbª^``lrkqfkdªsîr^qflkpª^t^v coljª^ªc^foªobcib`qflkªlcªqebªobîª`lkafqflkpªc^`fkdª^ªcfoj+ 12 Fkabba)ªtbªcbbiªlkbªlc qebªcbtªqefkdpªtlopbªqe^kªjôh*ql*jôhbqª^``lrkqfkdªfpªîiltfkdªfqªfkªqebª_lljp ^kaªprpmbkafkdªfqªfkªmboflapªlcªjôhbqªabìfkb)ªloªcloª^ppbqpªqlª_bªpfjmivªpefcqba coljªqebª^s^fi^_ib*clo*pîbª^kaªqoâfkdª_llhpªlkqlªqebªelia*ql*j^qrofqvª%_^khfkd& _llh)ªtebobªqebvª`^kª_bªsîrbaªafccbobkqiv )ª_rqªtebobªqebª_^khÖpªe^sbªklªobî `^m^`fqvªqlªeliaªqebª^ppbqpªqlªj^qrofqv+ªFqªpbbjpªqlªrpªqe^qªqefpª^mmol^è)ªfkòb^p * fkdivªâlmqba)ªtlriaªtlopbkªlkbªlcªqebªj^fkªmol_ibjpªlcªmol*`vìf`îfqv )ªtefè fpªqe^qª_^khbopª^kaªfksbpqlopªm^vªfkprccf`fbkqª^qqbkqflkªfkªqebª_lljªqlªqebªmlppf * _fifqvªqe^qªmof`bpªj^vªcîiª_^`hªtebkªqebª_lljªfpªlsbo+ªJloblsbo)ªfqªalbpªklqªpqofhb rpª^pªòbaf_ibªcloª^ª_^khªqlªabìôbªfkªqebªjfaaibªlcª^ªòfpfpªqe^qªfqªfpªqebfoªfkqbk * qflkªqlªeliaª^kª^ppbqªqlªj^qrofqvª^kaªplªfqªfpªklªilkdboªkb`bppô vªqlªsîrbªfqªrpfkd `roobkqªjôhbqªmof`bp)ªfcªqebª^ppbqªfpªcrkabaªrpfkdªpeloq*qbojªjlkbvªjôhbqª_lo * oltfkdªqe^qªe^pªaofbaªrmªloªfpªifhbivªqlªalªplª_bclobªqebª^ppbqªj^qrobp+ª>qªqebªjfk* fjrjªqefpªfpªklqªobpmlkpfsbªqlªqebªfkòb^pbaªabj^kapªlcªqo^kpmôbk`vªqe^qª^``lj* m^kvªqebª`lkcrpflkªlcª^ªòfpfp+ª Tbª_bifbsbªqe^qªqebobªfpª^kªâgrpqjbkqªqlªqebªjôh*ql*jôhbqª^mmol^è)ªqe^q _bqqboªobcib`qpªqebªmorabkqfîªfkqbobpqpªlcªcfk^k`fîªcfojp)ªtfiiªifjfqªifnrfafqv*p^m * mfkdªclo`baªpîbpªlcª^ppbqpªtebobªqebobªfpªklªcrkafkdªafccf`riqv)ª^kaªfpªjlobªelkbpq qe^kª^ªprpmbkpflkªlcªjôhbq*ql*jôhbqªloª^ªtelibpîbªpefcqªlcª^ppbqpªqlª"eliaªql j^qrofqv"+ªQebª^mmol^èªfpª`îibaªjôh*ql*crkafkd) 13 ^kaªqebªmofk`fmibªfpªqe^q ^ppbqpªpelriaª_bªsîrbaª^kaªj^k^dbaª)ªklqª^``loafkdªqlªqebªfkqbkqflkªlcªqebªelia* boª)ª_rqª^``loafkdªqlªqebªcrkafkdª`^m^`fqvªlcªqebªeliabo +ª@^m^`fqvªqlªeliaªlkªql ^ppbqpªfpªaofsbkª_vªqebªj^qrofqvªlcªqebªcrkafkdªlcªqebª^ppbq+ªFkªlqeboªtloap)ªfcª^ _^khªe^pªcrkabaªfqpªqtbkqv*vbôª^ppbqpªtfqeªlkb*jlkqeªloªpeloqbo*qbojª_loolt * fkdp)ªqebkªte^qbsboªqebfoªfkqbkqflk)ªqebvªpelriaªsîrbªqebª^ppbqªrpfkdª`roobkqªjô* hbqªmof`bp+ªFc)ªeltbsbo)ªqebª^ppbqªfpªcrkabaªtfqeªqebªfppr^k`bªlcª^ª.-*vbôª_lka)ªqeb Geneva11_latest.qxp 07/05/2009 16:48 Page 42

42 The Fundamental Principles of Financial Regulation

^ppbqª`^kª_bªsîrbaª_vª^ªqefoaªmôqvªsîrboª%qlªbkprobª^d^fkpqªco^raribkqªsîr^ * qflkp&ªlkªqebª_^pfpªlcªqebªmobpbkqªsîrbªlcªqebªifhbivª^sbo^dbªmof`bªlsboªqebªkbuqªqbk vbôp+ªFkªmôqf`riô)ªqefpªilkd*orkªsîr^qflkª`^kªmi^`bªibppªtbfdeqªlkª`roobkqªa^fiv mof`bªsli^qfifqvª^kaªjlobªlkªsîrfkdªqebªbumb`qbaª`^peªciltpªlsboªqebªkbuqªqbk vbôp+ªQefpªsîr^qflkªbubo `fpbªtlriaª_bª_bpqª`ôofbaªlrqªlkªqebª_^pfpªlcªmllipªlc ^ppbqpª^kaªmllipªlcªcrkafkdª^kaªklqªlkª^kªfkafsfarîª^ppbqª_vª^ppbqª_^pfp+ª Fcª^ª_^khªfpªcrkabaªlsboªqebªpeloq*qboj)ªqefpª^mmol^èªtfiiªmolsfabªklªjlob obifbcª^kaªtlriaª_bªklªibppªmol*`vìf`îªqe^kªjôh*ql*jôhbqªsîrbª^``lrkqfkd+ Eltbsbo)ªqefpªtlriaª_bª^ªc^foªobcib`qflkªlcªqebªmof`bªofphªqebªcfojªc^`bpªfcªcrkafkd fpªklqªoliibaªlsbo+ªFc)ªeltbsbo)ª^ª_^khªebiaª^ªmlliªlcªilkd*qbojª^ppbqpªqlªtefèªfq `lriaª^pòf_bª^ªmlliªlcªilkd*qbojªcrkafkdªqebkªfqªtlriaªklqª_bªclo `baªqlªpbiiª^k ^ppbqªqebª_^khª`lkpfabobaªdllaªsîrbªlsboªqebªqfjb*elofwlkªlcªfqpªcrkafkd)ªjbob * ivª_b`^rpbªlcªa^fivªmof`bªè^kdbp+ª Qebª`lrkqbo*ôdrjbkq)ªlcª`lropb)ªfpªqe^qª^ª_^khª`^kklqª^pòf_bª^ªmôqf`riôªmlli lcªif^_fifqfbpªqlª^ªmlliªlcªmôqf`riôª^ppbqp)ªpfk`bªîiªif^_fifqfbpªfkafpqfkdrfpe^_ivª^ka môfªm^pprªcfk^k`bªîiª^ppbqpªbnrfsîbkqiv+ªªTbªbumilobª^ªt^vªfkªtefèªprèª^ªÖ`ôsb* lrqÖ)ªtebob_vª^ªpmb`fcf`ªmlliªlcª^ppbqpª`lriaª_bªobi^qbaªqlª^ªpmb`fcf`ªmlliªlcªif^_fif * qfbp)ª`lriaª_bªrkaboq^hbkªfkª?luª2+.+ª

Box 5.1 Mark-to-Funding: an exposition

Qebobªôbªqtlªmofk`fmîªjbqelapªcloªsîrfkdª^kª^ppbq+ªªQebªcfopqªfpªfqpª`roobkq jôhbqªsîr^qflk)ªloª^kªbpqfj^qbªlcªte^qªqe^qªjfdeqª_b+ªªQebªpb`lkaªfpªqebªmobp* bkqªsîrbªlcªqebª%bpqfj^qba&ªcrqrobª`^peªciltpªcoljªqe^qª^ppbq+ªªKlojîivªô_f * qo^dbªfkªqebªjôhbqªclo`bpªqebpbªqtlªîqbok^qfsbªjbqelapªlcªsîr^qflkªfkqlªìlpb îfdkjbkq8ª_rqªpljbqfjbpªifnrfafqvªofphp)ª^kaªlqeboª`^rpbpªlcªjôhbqªavpcrk` * qflkîfqv)ª`^rpbpªqebpbªqtlªîqbok^qfsbª^mmol^èbpªqlªafsbodb)ªl``^pflkîiv peômivªpl)ª^pªfkªqebª`^pbªlcªjloqd^db*_^`hbaª^ppbqpªfkªqebª`roobkqªòfpfp+ªªFqªfp lroªqebpfpªqe^qªqebªèlf`bªlcªsîr^qflkªjbqelapªfkªprèª`^pbpªpelriaª_bª_^pba lkªqebªobi^qfsbªj^qrofqvªlcªqebªfkqbojbafô vÖpªcrkafkd+

Fkªloaboªqlªfiirpqo^qbªqebª`^pbªjlpqªpfjmiv )ª^pprjbªqe^qªqebobªôbªqtlª_^khp)ª> ^kaª?+ªª?lqeªeliaª^ªpfkdibªfabkqf`îª^ppbq)ªtelpbªjôhbqªsîrbªe^pªcîibkªtbii _biltªqebªmobpbkqªsîrbªlcªcrqrobªbumb`qbaª`^peªciltp+ªª?^khª>ªe^pªcfk^k`baªqefp ^ppbqªlkªqebª_^pfpªlcª^ªilkdªaro^qflkªif^_fifqv )ª%tebobªqebªaro^qflkpªlcª^ppbqª^ka if^_fifqvªôbªbu^`qivªj^qèba&8ªtebob^pª_^khª?ªe^pªcfk^k`baªqebªp^jbª^ppbqªlk qebª_^pfpªlcª^ªpeloq*a^qbaª%lkbªmbofla&ªif^_fifqvªtefèªkbbapªqlª_bªoliibaªlsbo b^èªmbofla+ªªFcªqebª^ppbqpªfkª_lqeª_^khpª%>ª^kaª?&ªôbªsîrbaªbnrîivª^qªqebªi^q * bpqªjôhbqªmof`b)ª_lqeªtfiiª^mmbôªqlª_bªfkplisbkq+ªªQefpªfpªrkc^foªqlª_^khª>) tefèªe^pªklªkbbaªqlªpbiiªqebª^ppbq)ª^kaª`^kªofabªlrqªqebªifnrfafqvª%jôhbq&ªòf * pfp)ªdôkbofkdªqebª`^peªciltpªfkªarbª`lropb+ªªFc)ªlkªqebªlqeboªe^ka)ªqebª^ppbqpªfk _lqeª_^khpªôbªsîrbaª^qªqebªmobpbkqªsîrbªlcªbumb`qbaª`^peªciltp)ª_lqeªj^v ^mmbôªqlª_bªplrka)ª_rqªqefpªqllªfpªfk`loob`q)ªpfk`bªqebªifnrfafqvªòfpfpªjb^kpªqe^q _^khª?ªj^vªbfqeboªklqª_bª^_ibªqlªoliiªlsboªfqpªcrkafkdªkbbapª^qªîi)ªloªlkivª^qª^ jrèªefdeboªo^qbªlcªfkqbobpq+ªª?^khª?ªobîivªfpªfkplisbkq+ªª@ibôivªqebobªfpª^ªj^glo afccbobk`bªfkªqebfoªplisbk`v)ªabmbkafkdªlkªqebfoªobi^qfsbªcrkafkdªmlpfqflkp)ª^ka qebª^``lrkqfkdªjbqelapªlrdeqªqlªobcib`qªqefp+ Geneva11_latest.qxp 07/05/2009 16:48 Page 43

Regulation of Liquidity and Maturity Mismatches 43

Box 5.1 contd. >môqªcoljªqelpbªtelªtlriaªabkvªqe^qªjôhbqªmof`bpª`^kªbsboªjlsbª^t^vªcolj qebªcrka^jbkqîpªlcªqebªM +S+ªlcªbumb`qbaªcrqrobª`^peªciltp)ªqebª^_lsbª^kîvpfp pelriaªklqª_bª`lkqolsbopfî+ªªQebªmol_ibjªqe^qªj^kvªpbbªtfqeªjôhªqlªcrkafkd) fkpqbâ)ªfpªmo^`qf`î+ªªQebª^_lsbªbu^jmibªt^pªmromlpbcriivªpfjmifcfbaªtfqeªb^è _^khªe^sfkdªgrpqªlkbª^ppbqªcfk^k`baª_vªlkbªif^_fifqv +ªªFkªmo^`qf`bª_^khpªe^sbªk ^ppbqpªcfk^k`baª_vªgªafccbobkqªclojpªlcªcrkafkd)ªtebobª_lqeªkª^kaªgªôbªiôdb krj_bop+ªªFqªfpªklqªmlppf_ibªklojîivªqlªp^vªqe^qª^ªmôqf`riôªif^_fifqvªcfk^k`bpª^ môqf`riôª^ppbq8ªfkpqbâªîiªif^_fifqfbpªdlªfkqlª^ª`ljjlkªmlqªqlªcfk^k`bªîiª^ppbqp+ªª Lkªqefpªsfbt)ªîqelrdeªqebªl_gb`qfsbpªlcªjôh*ql*crkafkdªj^vª_bªmo^fpbtloqev) fqª`^kklqª_bªalkbªfkªmo^`qf`b+

Figure 5.1

Assets Liabilities

1 .-- n

o 0 i t a r u / D

. A B C D

- 2- Share of portfolios

Sîr^qflkªPb`qflkª> Jôhbqªmof`b Sîr^qflkªPb`qflkª_ .,/ªjôhbqªmof`b)ª.,/ªMS Sîr^qflkªPb`qflkª` /,0ªjôhbqªmof`b)ª.,0ªMS Sîr^qflkªPb`qflkªA MS

Tbªqefkhªqe^qªqefpªl_gb`qflkª`^kª_bªjbq+ªªQebobªôbª`^pbpªtebobªmôqf`riôª^ppbqp ^kaªif^_fifqfbpª`^kª_bªafob`qivªobi^qba)ª`lsbobaª_lkapª^kaªmc^ka_ofbcbª_bfkd bu^jmibp+ªªJloblsboªl``^pflkpªtebkªM +S+pª^kaªjôhbqªmof`bpªafsbodbªpfdkfcf * `^kqivªôbªifhbivªqlª_bªnrfqbªoôb+ªªFkªmo^`qf`bªlroªmolmlpîªtlriaªîiltª^ª_^kh) tebkªprèª^ªafsbodbk`bªafaªl``ro)ªqlªÖ`ôsbªlrqÖªqebª^ppbqpªqlªtefèªqefpª^mmifba) ^kaªqlªpbib`qªtefèªif^_fifqfbpªfqªèlpbªcoljªfqpªmloqcliflªqlªprmmloqªqelpbª^ppbqp+ Prmmlpbªqe^qªqebªèlpbkªif^_fifqfbpªeâª^pªilkdª^ªaro^qflkª^pªqebª^ppbqp)ªqebkªqeb sîr^qflkªtlriaª_bªM+S8ªfcªeîcª^pªilkd)ªqebkªqebªsîr^qflkªtlriaª_bªeîcªM+S+ª^ka eîcªjôhbqªmof`b+ªªFkªCfdrobª2+.ª^_lsbªtbªpeltªeltªqebªsîr^qflkªtlriaª_b alkbªcloª^ª`ôsbªlrqªfkslisfkdªqtlª^ppbqpª_^`hbaª_vªqeobbªqvmbpªlcªif^_fifqv )ª_rq qebªmofk`fmibª`lriaª_bªbuqbkabaªqlª^kvªkrj_boªlcª^ppbqpª^kaªif^_fifqfbp+ Geneva11_latest.qxp 07/05/2009 16:48 Page 44

44 The Fundamental Principles of Financial Regulation

Box 5.1 contd. Fcªqebobªt^pªprèª^ªÖ`ô sb*lrqÖ)ªqebª^ppbqpª^kaªif^_fifqfbpªfkslisbaªtlriaª_b buìrabaªcoljªqebªobpqªlcªqebª_î^k`bªpebbq)ªf+b+ª^kvªpr_loafk^qbaªab_qªrpbaªfk prèª^ªÖ`ôsbªlrqÖª`lriaªklqª_bªrpbaªîplªqlªp^qfpcvªqfboª/ªlcª?^pbiªFF)ªqebª^ppbqp,if^* _fifqfbpªfkªqebªÖ`ôsbªlrqÖªtlriaª`b^pbªqlª_bª`î`ri^qbaªfkªqebªbpqfj^qbpªlcªifnrfa* fqvªjfp*j^qèªfkªqebªobj^fkaboªlcªqebªmloqclifl8ª^kªbu`bmqflkªtlriaª_bªqe^qªqeb `ôsb*lrqªtlriaªpqfiiªcfdrobªqltôapªqebªlsboîiªbpqfj^qbaªibsbo^dbªo^qfl+

Fkª^ªpbkpbªte^qªqefpªmolmlpîªalbpªfpªqlªîiltª^kvª_^khªfkª^ªifnrfafqvªòfpfpªqlªpbq rmªfqpªltkªfkqbokîªÖ_âª_^khÖªjbè^kfpjªplªilkdª^pªfqªe^pªprccf`fbkqªilkdªqboj crkafkdªqlªprmmloqªqe^q+ªªQebªkbbaªcloªprèª^ªjbè^kfpjªpelriaªlkivª_bªl``^ * pflkî)ª_rqª^ª_bkbcfqªlcªalfkdªqefpªfpªqe^qªfqªpelriaªmolsfabª^kªâafqflkîªfk`bk * qfsbªcloª_^khpªqlªpbbhªlrqªâafqflkîªilkdboªqbojªcrkafkdªfkªklojîªqfjbp+

Prèª^ª`ôsbªlrqª`lriaª_bªlmbo^qbaªcibuf_ivªtfqeªklªifjfqªlkªqebªrpbªlcª^ppbqpªlo if^_fifqfbpª^ppfdkbaªqlªfq)ªtefèª`lriaªsô vªlsboªqfjb+ªªOb`îiªqe^qªqebªbubo `fpb tlriaªlkivª`ljbªfkqlªlmbo^qflkªtebkªqebªM +S+ªlcªbumb`qbaª`^peªciltpªt^pªpfd * kfcf`^kqivªdob^qboªqe^kªqebª`roobkqªjôhbqªsîrbªlcªqebª^ppbqpªfkslisba+ªª?rqªprè ^ªjbè^kfpjªjfdeqªe^sbª_bbkªsbovª_bkbcf`fîªqlªprèª_^khpª^pªeâª^ªprccf`fbk * `vªlcªilkdboªa^qbaªif^_fifqfbpªfkªqebªob`bkqªòfpfp+

Fkªdbkboî)ªqebª`roobkqªsîrbª^``lrkqfkdªpvpqbjªafp`lro^dbpª_^khpªcoljªilkd* qbojªcrkafkd+ªQebªobtôaªqlª^ª_^khªlcªibkdqebkfkdªqebªj^qrofqvªlcªfqpªcrkafkd fpªqe^qªfqªmolsfabpªdob^qboªqfjbªtfqeªtefèªqlªafsbopfcvªofphp+ª?rqªqefpªfpªilpqªfc ^ppbqpªôbªsîrbaª^pªfcªqebvªtbobªqlª_bªpliaªqljloolt +ªFqªpelriaª_bªklªpromofpb qe^qª_^khpªe^sbªobpmlkabaª_vªobivfkdªlkªèb^mboªpeloq*qbojªcrkafkd)ª_rqª^pªtb e^sbªafp`rppbaª^_lsb)ªqefpªfpªofphvª_lqeªcoljªqebªmbopmb`qfsbªlcª^kªfkafsfarî _^khª^kaªlcªqebªcfk^k`fîªpvpqbj+ªJôh*ql*crkafkdªtlriaªbk^_ibª_^khpªqlª`^m * qrobªqebªobar`qflkªlcªofphª^ppl`f^qbaªtfqeªilkdbo*qbojªcrkafkdª^kaªtlria objlsbªqefpªôqfcf`fîªafpfk`bkqfsb+ªLroªmolmlpîªqlªèôdbª`^mfqîªcloªpfdkfcf`^kq j^qrofqvªjfpj^qèbpªfkªqebªcrkafkdªlcªilkd*qbojª^ppbqpªpelriaªîplª^rdjbkq qefp+ªTebobª_^khpªe^sbªilkd*qbojªcrkafkd)ªjôh*ql*crkafkdªtlriaªîiltªqebj qlªobcib`qªqebªobîªofphpªc^`fkdªqebj)ª^kaªklqªqlªâaªqlªqebfoªltkª^kaªpvpqbjf` ofphpª_vªclo`fkdªqebjªqlª_be^sbª^pªfcªqebvª^`qrîivªe^sbªpeloq*qbojªcrkafkd+ªFk qefpªobdôa)ªjôh*ql*crkafkdªfpªfkªqebªpmfofqªlcª^ªqorbª^kaªc^foªobcib`qflkªlcªqeb cfk^k`fîª`lkafqflkpªc^`fkdª^ª_^kh+

Qefpª^mmol^èªtlriaªobar`bªpîbpªlcª^ppbqp)ª`^rpbaª_vªklªlqeboªob^plkªqe^k è^kdbpªfkªsîrbª^``lrkqfkdªlsboª^ªqfjbªmboflaªqe^qªfpªlcªifqqibªb`lkljf`ªobibs^k`b qlªqebªt^vªqebª^ppbqªfpªcrkaba+ªFcªobdri^qlopªbjme^pfpbªpeloq*qbojªsîr^qflkpªfoob * pmb`qfsbªlcªqebªcrkafkdªlcª^ppbqp)ªqebªcfk^k`fîªpvpqbjÖpªk^qroîªofphª^_plo_bopªå qelpbªtfqeªilkdªqbojªcrkafkdªloªif^_fifqfbpªtelª`^kªafsbopfcvª`roobkqªofphpªlsbo qfjbªåªtfiiªklqª_bª^_ibªqlª^`qªfkªqe^qª`^m^`fqv )ªqebob_vªobar`fkdªqebªcfk^k`fîªpvp * qbjÖpªk^qroîªobpfifbk`b+ªT bªtlriaª_bªibcqªtfqeª^kªlsbo*obif^k`bªlkªpeloq*qboj crkafkdª^kaªofphªqoâbop+ªOfphªqoâbopªôbªqelpbªtfqeªifjfqbaª`^m^`fqvªqlªafsbopfcv ofphpªqeolrdeªqfjbª_b`^rpbªlcªqebfoª`^mfqîªloªcrkafkdª^kaªtelpbªofphªj^k^dbjbkq pqo^qbdvªfp)ªbccb`qfsbiv)ªqlªobar`bªofphpªtebkªqebvªofpbª_vªpbiifkdªqebjªlkªqlªpljb * Geneva11_latest.qxp 07/05/2009 16:48 Page 45

Regulation of Liquidity and Maturity Mismatches 45

lkbªbipbªobar`baª%pbbªMbop^ra)ª/--5_&+ Pljbªtloovª^_lrqªqebªp^jbª^ppbqª_bfkdªsîrbaªafccbobkqivª_vªafccbobkqªfkpqfqr * qflkp+ªLcª`lropbªqefpªfpªîobâvªalkbªtfqefkªqebªcfk^k`fîªpb`qloª^pª^ªtelib+ªQebob ôbª^ppbqpªebiaª_vªfkpro^k`bª`ljm^kfbpªqe^qªôbªsîrbaªlkª^ªelia*ql*j^qrofqvª_^pfp qe^qªôbªîplªebiaª_vª_^khpª^kaªsîrbaªlkª^ªjôh*ql*jôhbqª_^pfpª^kaª^``bmqba ob^plkfkdªfpªqe^qª^kªfkpro^k`bª`ljm^kvÖpªif^_fifqfbpªôbªilkdbo*qboj+ªJôh*ql*crka* fkdªjbobivªbuqbkapª^kaªobfkclo`bpªqefpª^mmol^èªîlkdªibppªâªel`ªifkbpªqe^kªfpª`ro* obkqivªqebª`^pbªtfqeª"Ibsbiª0"ª^ppbqpªloª^ppbqpª`roobkqivªebiaªfkªklk*jôh*ql*jô * hbqªobdfjbpªjlobªdbkboîiv+ª Ibqªrpª`lkìrabªlroªafp`rppflkªlkªjôh*ql*crkafkdªtfqeªqtlª`^sb^qp+ªCfopq) tefibªjôh*ql*crkafkdªtfiiªobar`bªqebªabdobbªlcªjôhbqªfiifnrfafqvª`^rpbaª_v clo`baªpîbpªqe^qªtlriaªklqªe^sbªl``roobaªtbobªfqªklqªcloª^ªsîr^qflkª^kaªofphªelof* wlkªqe^qªfpªklqªobibs^kqªqlªqebª^ppbqªeliafkd)ªtbªôbª^tôbªqe^qªjlpqª_^khpªôbªfk c^`qªcrkabaªlsboªqebªpeloq*qboj+ªLcª`lropb)ªqebªâlmqflkªlcªjôh*ql*crkafkdªj^v îplªbk`lro^dbªcfk^k`fîªfkpqfqrqflkpªtfqeªilkd*qbojªcrkafkdªqlª_bª_rvbopªlcªafp * qobppbaª^ppbqp)ªtefèªtfiiªîplªprmmloqªjôhbqªifnrfafqv +ª Qebªpb`lkaª`^sb^qªfpªqe^qªîiltfkdª"elia*ql*crkafkdª^``lrkq"ªdo^kqpªcfk^k`fî fkpqfqrqflkpªpljbªafpòbqflkªeltªqlªsîrbª^ppbqp+ªQefpªfkqolar`bpªâafqflkîª^pvj* jbqof`ªfkcloj^qflkª^kaªjfdeqªefkaboªcrqrobªcrkafkd+ªQebobªôbªqelpbªtelªôdrb qe^qªc^foªsîrbª^``lrkqfkdªfpª^pªô_fqoô vª^ªsîr^qflkªlcª^ªilkd*qbojª^ppbq)ª%loªif^ * _fifqfbp8ªj^kvªcbbiªrk`ljcloq^_ibªtebkª^ª_^khªobar`bpªilppbp,o^fpbpªmolcfqpª_vªtofq* fkdªaltkªqebªsîrbªlcªfqpªprmmlpbaivªmô*sîrbªif^_fifqfbpª_b`^rpbªòbafqªofphªibâp qebjªqlª_bªqoâbaª^qª^ªafp`lrkq)ªpbbª^jlkdpqªlqebop)ª?rfqboª/--6&)ª^pª^kvªlqebo ) _rqªqlªlsbo`ljbªqebª^pvjjbqof`ªfkcloj^qflkªmol_ibjªtbªtlriaªob`ljjbkaªqe^q tebobª^ppbqpªôbªklqªsîrbaªlkª^ªjôh*ql*jôhbqª_^pfp)ªqebvªtfiiªe^sbªqlª_bªsîrba _vª^ªqefoaªmôqvª^kaªtbªtlriaªîplªpr_pòf_bªqlª>iibkª^kaª@ôibqqfª%/--5&ªmolmlp * îªqe^qªb^èªcfk^k`fîªfkpqfqrqflkªpelriaªmr_ifpeªqtlª_î^k`bªpebbqp7ªlkbª_^pbaªlk jôh*ql*crkafkdª^kaª^klqeboªlkbª_^pbaªlkªjôh*ql*jôhbqªbsîr^qflkp+ª

5.4 Capital Charges against Illiquidity

Lroªpb`lkaªmolmlpbaªjb^probªqlªobar`bªifnrfafqvªofphªfpªqlªfjmlpbª^ª`^mfqîªèôdb lkªfq+ª@lk`bmqrîiv)ªobdri^qlovª`^mfqîªpelriaª_bªpbqª^pfabª^d^fkpqªqebªofphfkbppªlc qebª`lj_fk^qflkªlcª^kª^ppbqª^kaªfqpªcrkafkd)ªpfk`bªqebªofphfkbppªlcª^kª^ppbqªabmbkap qlª^ªiôdbªbuqbkqªlkªqebªt^vªfqªfpªcrkaba+ªQebªdlîªlcªlroªl_gb`qfsbªlcªqefpªifnrfaf * qvªâgrpqbaª`^mfqîªèôdbpªfpªqlªobar`bªcrkafkdªifnrfafqvªofphª_vªbk`lro^dfkdª_^khp qlªcfkaªilkd*qbojªcrkafkd)ª^kaªafpprâbªqebjªcoljªdob^qboªibsbo^db+ª Ibqªrpªcfopqª`lkpfaboªqebªtfaboªjbofqpªlcªqefpªmofk`fmibª_bclobªobqrokfkdªqlªjlob mo^`qf`îªfpprbpªlcªbpqfj^qfkdªobdri^qlo vª`^mfqî)ªpfk`bªqebobªtfiiª_bªj^kvªt^vpªlc ^mmivfkdªqefpªmofk`fmibª^kaªqebªmob`fpbªjbqelalildvªlcª^mmif`^qflkªfpªibppªfjmlo * q^kqªqe^kªqebªmofk`fmib+ªQebªmofk`fmibªfpªfkªc^`qªnrfqbªìlpbªfkªpmfofqªqlªqebªjfp * j^qèªiâaboªqe^qªeâª_bbkª`lkpfabobaª_vªqebª?^pibª@ljjfqqbbª^ª`lrmibªlc ab`âbpª^dl+ª Qlªâlmqªqebª?^pibªi^kdr^db)ªfcª`^mfqîªfpªqlª_bªofphªpbkpfqfsb)ªfqªjrpqª_bªpbkpfqfsb klqªgrpqªqlªqebªofphªlcª^ppbqp)ª_rqªqlªqebªofphªlcªqebª`lj_fk^qflkªlcªqebª^ppbqª^kaªfqp crkafkd)ªtefèªfkìrabpªqebªibsbo^dbª^kaªj^qrofqvªjfpj^qè+ªT bªôdrbªqe^qªfc qtlª_^khpªeliaªqebªp^jbª^ppbq)ªqebªlkbªcrkafkdªqebª^ppbqªtfqeªqbojªabmlpfqp Geneva11_latest.qxp 07/05/2009 16:48 Page 46

46 The Fundamental Principles of Financial Regulation

tlriaªpbqª^pfabª^ªiltboª^jlrkqªlcª`^mfqîªqe^kªqebªlkbªcrkafkdªqebª^ppbqpªtfqe lsbokfdeqª_looltfkdªcoljªqebªjlkbvªjôhbqp+ªFcªcrkafkdªjôhbqpªaofbaªrmªclo qeobbªjlkqep)ªqebªpeloq*qbojªcrkabaª_^khªtlriaª_bªfkªafccf`riqvª^kaªtlriaª_b clo`baªqlªpbiiª^ppbqpªqe^qªtlriaªtlopbkªqebªifnrfafqvª^kaªplisbk`vªbksfolkjbkqªclo fqpª`ljmbqfqlop+ªQebª_^khªtlriaª`^rpbª^ªcfob*pîbªbuqbokîfqvªarbªqlªiltªjôhbqªifn* rfafqv+ª Fkªmo^`qf`îªqbojp)ªâgrpqjbkqpªqlª`^mfqîªqlªobcib`qªqebªj^qrofqvªjfp*j^qè _bqtbbkª^ppbqpª^kaªif^_fifqfbpª`lriaª_bªalkbª^pªpfjmibªjriqfmibpªqlªqebª`roobkq obnrfobjbkqpªcloª`^mfqîªtefèªôbª_^pbaªlkªqebªòbafqªnrîfqvªlcª^ppbqp+ªFcªqeb _lrkaôvªifkbpªlcªobdri^qflkªôbªob`^pqª^pªtbªprddbpqªfkªPb`qflkª1)ªqebªjriqfmibp `lriaªe^sbª^ªjfkfjrjª_biltª.+-)ªîiltfkdªqefpªkbtª`^mfqîªobnrfobjbkqªqlª_b ^mmifbaªqlªfkpqfqrqflkpªqe^qªe^sbª^ppbqpªcrkabaª_vªilkd*qbojª`^mfqîª^kaªbk^_ifkd qebjªqlªmrqª^pfabªibppª`^mfqîªqe^kªqelpbªtelªcrkaª^ppbqpª_vª_looltfkd+ Tbª`lriaªe^sbª^ª`ljmibqbivªpbmô^qbªèôdbª_rqªtbªtlriaªmobcboªqlªfkqbdo^qb qebªifnrfafqvª"èôdb"ªtfqeªqebªbufpqfkdª`^mfqîªèôdbªqeolrdeªqebªjriqfmibªclo qeobbªob^plkp+ªCfopqªtbªcbbiªqe^qªqefpªtlriaªj^hbªfqªb^pfboªqlªâlmqªdfsbkªqebªbufpq * fkdª`^mfqîªâbnr^`vªobdfjb+ªPb`lka)ªifnrfafqvªfpª^ª`lk`bokªfkª`^pbpªtebobªòbafq ofphªfpª^kªfpprbª^kaªplªfqªj^hbpªpbkpbªqe^qªtbªôbªcl`rpbaªlkªqebªifnrfafqvªlcª"ofphv" ^ppbqp+ªFqªe^pª_bbkªprddbpqbaªqe^qª`lj_fkfkdªqtlªboolo*molkbªjb^probp)ª`^mfqî âbnr^`vª^kaª^ªifnrfafqvªjriqfmib)ª`ljmlrkapªqebªfkafsfarîªboolop)ª_rqªqe^qªfp lkivªqebª`^pbªpelriaªqebobª_bª^ªpqolkdªmlpfqfsbª`loobi^qflkªlcªqebªboolopªlcª_lqe jb^probp8ªfqªfpªmol_^_ibªqe^qªqebªboolopªôbªfkªc^`qªkbd^qfsbivª`loobi^qba+ªDob^qbpq j^qrofqvªjfp*j^qèbpªlcª^ppbqpª^kaªif^_fifqfbpªåªlroªjb^probªlcªpvpqbjf`ªifnrfafqv åªqbkaªqlª_bªpbbkª^qªqebªebfdeqªlcª^ª_lljªtebkªqebª`roobkqª`^mfqîªâbnr^`vªbpqf * j^qbpªôbªifhbivªqlªrkabobpqfj^qbªofph+ª Lqebopªe^sbªôdrbaªqe^qªtbªmi^`bªqllªjrèªtbfdeqªlkªqfjb*ª^kaªpq^qb*sô vfkd `^mfqîªobnrfobjbkqp8ª^kaªvbqªlqebopªe^sbªmolmlpbaªqe^qª_^khpª`lriaªfkprob ^d^fkpqªifnrfafqvªpeloq^dbp)ªcloªbu^jmibªMbolqqfª^kaªPrôbwª%/--6&+ª@ibôivªprè fkpro^k`bpªtlriaªe^sbªqlª_bªmolsfabaª_vªqebªmr_if`ªpb`qlo)ªpfk`bªlkivªqebª@bkqoî ?^khª`^kªmolsfabªprccf`fbkqªifnrfafqvªfkª^ªòfpfp+ªªFkªlroªsfbtªqebªmobjf^ªqe^qª^ @bkqoîª?^khªpelriaªibsvªpelriaªobi^qbªqlª^ªjb^probªlcªj^qrofqvªjfpj^qè)ªpl qebobª`lriaª_bª^kªfabkqf`îªmob`rkfôvªp^k`qflkªtefèbsboªolrqbªt^pªèlpbk+ªªQeb afccbobk`bªtlriaª_bªqe^qªlroªmolmlpîªtlriaªîplªfjmfkdbªlkªqebªobnrfobaªnr^k * qrjªlcª`^mfqî)ªtebob^pªqebªfkpro^k`bªmolmlpîªtlriaªklq+ªªTbªobdôaªqebªbccb`qfsb afccbobk`bª_bqtbbkªqebªqtlªmolmlpîpª^pªjfklo+ Tbªmolmlpbªqe^qªqebªj^qrofqvªjfpj^qèªjriqfmibªfpª^ªcrk`qflkªlcªqebªjlkqep lcª bccb`qfsb jfpj^qè _bqtbbkªqebª^ppbqªj^qrofqvª^kaªqebªcrkafkdªj^qrofqv + Bpqfj^qfkdªqebªbccb`qfsbªcrkafkdªj^qrofqvªfpªjôdfkîivªb^pfboªqe^kªbpqfj^qfkdªqeb bccb`qfsbª^ppbqªj^qrofqv +ªFqªiôdbivªobi^qbpªqlªqebªqbojªlcªqebª_looltfkd+ª>kªfpprb ôfpbpªtebobªcrkafkdªfpªqeolrdeªabmlpfqpªtefèªqbkaªqlª_bªbccb`qfsbivªilkd*qboj crkafkd)ª_rqªabmlpfqlopªlcqbkªe^sbªfkpq^kqª^``bpp+ªFkªqefpª`^pbª_^khpª`lriaª_b dfsbkª^kªlmmloqrkfqvªqlªmolsbªqlªqebfoªprmbo sfploªqe^qªqebªbccb`qfsbªj^qrofqvªlc qebfoªabmlpfqpªfpªilkdboªqe^kª^ªa^v )ªmboe^mpªrpfkdªm^pqªabmlpfqª_be^sflroªfk pqobppbaªbksfolkjbkqpª^pªbsfabk`b+ 14 Qebªbccb`qfsbªj^qrofqvªlcª^kª^ppbqªq^hbpªqebª^ppbqÖpªjôhbqªifnrfafqvªfkqlª^``lrkq+ Tbªq^hbª^pªbccb`qfsbªj^qrofqvªlcª^kª^ppbqªqlª_bªqebªiltboªlcªqebªj^qrofqvªlcª^ªil^k15 ^kaªqebªibkdqeªlcªqfjbªfqªtlriaªq^hbªqlªpbiiªqebª^ppbqªfkª^ªpqobppbaªbksfolkjbkq tfqelrqªq^hfkdª^ªpfdkfcf`^kqªe^fo `rq+ª>ppbqpªqe^qªôbª^``bmqbaª_vªqebª`bkqoîª_^kh Geneva11_latest.qxp 07/05/2009 16:48 Page 47

Chapter Title 47

^pª`lii^qboîªcloªil^kpªtfqelrqª^ªpfdkfcf`^kqªe^foª`rqªtlriaªe^sbª^kª^ppbqªj^qrofqv lcªibppªqe^kªlkbªa^v+ªLkbªjlkqeªil^kpªe^sbª^kª^ppbqªj^qrofqvªlcª^ªjlkqeªloªibpp+ª Qebªmol_ibjªfpª^ppbppfkdªqebªbccb`qfsbªj^qrofqvªcloªilkd*qbojªil^kpªqe^qªôbªklq %klojîiv&ªbifdf_ibª^pª`lii^qboîª^qªqebª`bkqoîª_^kh+ªFkªqebª`roobkqªpqobppbaªbksf * olkjbkq)ª^ppbqpªqe^qªtbobªmobsflrpivª`lkpfabobaªefdeivªifnrfaªôbª_bfkdªpliaªtfqe iôdbªe^fo`rqp+ªFkªqebª`fo`rjpq^k`bpªtbobªqebªj^qrofqvªlcªil^kpªôbªfkªbu`bppªlcªqtl vbôp)ªprmbosfplopª`^kª^mmivª^ªabc^riqªo^kdbªlcª./ªqlª/1ªjlkqepª^kaªobnrfobª_^khp qlªmrqª2-"ªlcªqebfoª^ppbqpªfkª^ª./ªjlkqeª_r`hbqª^kaª2-"ªfkª^ª/1ªjlkqeª_r`hbqªql _bªobsfbtbaªmboflaf`îiv+ªFcªtbªeâªklqªmobsflrpivªmolmlpbaª`lrkqbo*`vìf`îªjri * qfmibpªqlªqebªbufpqfkdª`^mfqîªèôdbª%pbbªPb`qflkª1&ªtbªtlriaªîplªob`ljjbkaªobd* ri^qlopªqlªo^fpbªqebªmolmloqflkªlcª^ppbqpªebiaªfkªqebª/1ªjlkqeª_r`hbqªfkª^ªjbqela* f`îªj^kkboª^pª^ª_lljªmoldobppbpªqlª^`qª^pª^ª`lrkqbo*`vìf`îªjb^prob+ª Fcª^kª^ppbqª`^kª_bªpliaªqlªqebª`bkqoîª_^khªfkª^ªa^vª^kaªfpªcrkabaªtfqeªlsbokfdeq _looltfkd)ªqebobªfpªklªj^qrofqvªjfpj^qè+ªLkªqebªlqeboªe^ka)ªfcª^ªqtbkqvªvbô jloqd^dbªj^vª_bªpliaªfkª^mmolufj^qbivª/1ªjlkqep)ª^kaªfpªcrkabaªtfqeªlsbokfdeq jlkbv)ªqebobªfpª^ªpfdkfcf`^kqªj^qrofqvªjfp*j^qè+ª Fkªlroªgradbjbkq)ª^ªob^plk^_ibªo^kdbªcloªqebªjriqfmibªjfdeqª_bª-+2ªqlª/+-)ªtfqe ^ªj^qrofqvªjfpj^qèªlcªpljbtebobª_bqtbbkª3ªjlkqepª`ôo vfkdª^ªjriqfmibªlcª.+-+ Qebª`roobkqªòfpfpªfkbsfq^_ivª`îf_o^qbpªlroªpbkpbªlcªte^qªfpª^kªâbnr^qbªabdobbªlc p^cbqv+ªQbkªvbôpª^dl)ªbkprofkdªqe^qªcrkafkdªj^qrofqfbpªtlriaªîiltªfkpqfqrqflkpªql prosfsbª^ªcbtªtbbhpªfkªqebªc^`bªlcª^ªafpormqflkªqlªjlkbvªjôhbqpªt^pª`lkpfaboba âbnr^qb+ªFkªqebª/--4*5ªòfpfp)ªtelibpîbªjlkbvªjôhbqpªe^sbª_bbkªjlobªloªibpp ìlpbaªcloªj^kvª_looltbopªcloªlsboª^ªvbô + Cfkîiv)ªb^èª_^khª`^kª`î`ri^qbªfqpªbccb`qfsbªj^qrofqvªjfpj^qèªcloªqebªtelib _î^k`bªpebbqªloªîplªcloªpbsboîªpr_mllip+ªQe^qªfp)ª`^mfqîª`lriaª_bª^ppbppbaª^d^fkpq mllipªlcª^ppbqpªqe^qªe^sbª_bbkª^ppfdkbaªqlªmllipªlcªcrkafkd)ª^pªabpòf_baªfkª?lu 2+.+ªQebª^ppfdkjbkqªlcªmllipªlcªcrkafkdª`^kª_bªè^kdbaª^pªilkdª^pªqebª`^mfqî obnrfobjbkqªfpªqebkªob*^ppbppba+ªFqªfpª_bqqboªqlªîiltª_^khpªqlªclojªmllipªbumif`fq * ivªlkªqebfoª_î^k`b*pebbqpªo^qeboªqe^kªdfsbªqebjªqebªfk`bkqfsbpªqlªalªfqªsf^ªlcc*_î* ^k`bªpebbqªsbefìbp+ª Tbªob`ldkfpbªqe^qªbpqfj^qfkdªqefpªifnrfafqvªjriqfmibª^mmbôpªâªel`+ªTe^qªfp obnrfoba)ª^kaªte^qªtbªe^sbªqofbaªqlªj^mªlrq)ªfpª^ªco^jbtlohªcloª^ppbppfkdªqebªifn * rfafqvªofphª%qebªbccb`qfsbªj^qrofqvªjfp*j^qèªlcªmllipªlcª^ppbqpª^kaª`loobpmlkafkd mllipªlcªcrkafkd&+ªFqªe^pª_bbkªprddbpqbaªqe^qªifnrfafqvª_rccbopªtlriaª_bªpfjmibo ^kaªqebvªalª^mmbôªpl)ª_rqªlkivª_vªj^hfkdªqebª`îf_o^qflkªmol`bppªjlobªpr_gb` * qfsbªqe^kªtbªe^sbªalkbªebob+ª >pªît^vpªfkªobdri^qflk)ªqebobªôbªfpprbpªqlª_bªc^`baª`lk`bokfkdªeljb,elpq obpmlkpf_fifqfbp+ªQoâfqflkîivªobdri^qflkªlcªifnrfafqvªe^pª_bbkªqebªobpmlkpf_fifqvªlc qebªelpqª`lrkqov)ª^qªib^pqªfkªqebª`^pbªlcªpr_pfafôfbp+ªPr_pfafôfbpª`^k)ª^kaªal)ª^mmiv qlªqebªelpqª`lrkqovª`bkqoîª_^khªcloªifnrfafqvª^ppfpq^k`b+ªLkªqebªlqeboªe^ka)ª`bk * qoîfp^qflkªlcª%^kaªb`lkljfpfkdªlk&ªifnrfaª^ppbqpªe^pª_bbkª^ªhbvª^pmb`qªlcªòlpp* _loaboª_^khfkd+ªQe^qª`lkcif`qªlcªfkqbobpqªt^p)ªrkqfiªob`bkqiv )ª`^jlrci^dbaª_vªqeb tfiifkdkbppªlcªobdri^qlopªqlªafpmbkpbªtfqeª`lkqolipªlsboªifnrfafqv + ?rqªkltªqe^qª`lkcif`qªfpªobproc^`fkd)ªcloªbu^jmibªfkªqebªCP>Öpªobnrfobjbkqªfkªqeb RHªqe^qªîiª_^khp)ªfkìrafkdªclobfdk*ltkbaªpr_pfafôfbp)ªeliaªpmb`fcfbaªo^qflpªlc ?ofqfpeªmr_if`ªpb`qloªab_q+ªTbªtlriaªmolmlpbªobi^qfkdªprèªifnrfafqvªo^qflpªlkivªql qelpbªclobfdk*ltkbaªpr_pfafôfbpªabpfdk^qbaª^pªÖpvpqbjf`Öª%pbbªPb`qflkª0&+ª?bvlka qe^q)ªtbªtlriaªprddbpqªqe^q)ªtebob^pªqebªelpqª`lrkqovªobq^fkpªqebªmofjbªobpmlkpf* Geneva11_latest.qxp 07/05/2009 16:48 Page 48

48 The Fundamental Principles of Financial Regulation

_fifqvªcloªifnrfafqvªobnrfobjbkqp)ªqefpª`^k)ª^kaªpelria)ª_bªjlafcfbaª_vª_fi^qbo^i)ªlo jriqf*i^qbo^iªJLRp)ªmboe^mpªfkªBrolmbªqeolrdeªqebªdllaªlccf`bpªlcª@B?P+ Geneva11_latest.qxp 07/05/2009 16:48 Page 49

6 Other Regulatory Issues

6.1 Introduction

@^mfqîª^kaªifnrfafqvªobnrfobjbkqpªôbªqebªj^fkªpq^mibªlcªcfk^k`fîªobdri^qflk+ Kbsboqebibppªqebobªôbª^ªkrj_boªlcªlqeboªfpprbpªqe^qªkbbaªpljbªafp`rppflk)ªqelrde fkªpljbª`^pbpªlkivª_ofbciv+ >ªj^gloªcl`rpªlcªmr_if`ª^kdboªe^pª_bbkªqebªerdbªobjrkbo^qflkªlcªpbkfloª_^kh * fkdªlccf`fîp)ªtelªkltª^mmbôªqlªe^sbªob^mbaªfk^mmolmof^qbªmb`rkfôvª_bkbcfqpªclo q^hfkdªofphpªqe^qªlqebopªe^sbªbkabaªrmªpelriabofkd+ªJloblsbo)ªafaªqebªpqor`qrobªlc prèª^ªobtôaªpvpqbjªfqpbicªfkar`bªqebpbªp^jbªbub`rqfsbpªhkltfkdivªqlªq^hb bke^k`baªofph<ªTbªafp`rppªqefpªfkªpr_*pb`qflkª3+/++ Qebª_llj*_rpqª`vìbªfkªqebªelrpfkdªjôhbqªe^pª_bbkªìlpbivª^ppl`f^qbaªtfqe qebªòbafqª`vìbª^jlkdpqªqebª_^khp+ªFkªpr_*pb`qflkª3+0+ªtbª^phªtebqeboª^klqebo fkpqorjbkqªqe^qªqebª^rqelofqfbpªjfdeqªrpbªqlªa^jmbkªaltkªprèª`vìbpª`lriaª_b %`lrkqbo*`vìf`î&ªsôf^qflkpªfkªIl^k*ql*Sîrbª%IQS&ªloªil^k*ql*fk`ljbªo^qflp+ Tbªqlrè)ª_ofbciv )ªlkªfpprbpªobi^qfkdªqlª@obafqªO^qfkdª>dbk`fbp)ªfkªpr_*pb`qflk 3+1+)ª_bclobª`lkìrafkdªtfqeªpeloqª`ljjbkqpªlkª@bkqoîª@ibôfkdªElrpbpªclo abofs^qfsbp)ª^kaªqebªkbbaªqlªa^jmbkªbka*vbôª%^kaªbka*nrôqbo&ªpmfhbpªfkªcfk^k * `fîªjôhbqpª%pr_*pb`qflkª3+2+ª^kaª3+3+&+

6.2. Remuneration

@ljmbkp^qflkªmo^`qf`bpª^qªcfk^k`fîªcfojpªe^sbª_b`ljbª^ªqlmf`ªlcªmôqf`riôªpòrqf* kvªfkªob`bkqªvbôp+ªQebªdbkboîªmr_if`ªe^pª_b`ljbªfkòb^pfkdivª^tôbªlcªqebªefde ibsbipªlcªobjrkbo^qflkªfkªqebªcfk^k`fîªpb`qloª^kaªfkafdk^kqªtebkªiôdbªpbsbo^k`b m^`h^dbpªôbª^tôabaªqlªbub`rqfsbpªtelªe^sbªmobpfabaªlsboªjbiqaltkpªfkªco^k * èfpbªsîrbp+ª?lqeªobdri^qlopª^kaªmo^`qfqflkbopªe^sbªob`ldkfwbaªqebªmlqbkqfîªclo mbosbopbªfk`bkqfsbpªqlªibâªqlªrkgrpqfcfbaªofphªq^hfkdª^kaªqerpªqlª`lkqof_rqbªqlªpvp* qbjf`ªfkpq^_fifqv+ªMlifqf`îªibâbop)ªjlpqªob`bkqivª^qªqebªD/-ªprjjfq)ªe^sbª`îiba cloª^ªobbu^jfk^qflkªlcªqebªfk`bkqfsbªpqor`qrobªlcª`ljmbkp^qflkªfkªqebªcfk^k`fî pb`qlo+ª Lkbª_bkbcfqªlcª^ªòfpfpªfpªqe^qªfqªmoljmqpª^`qflkªqlªabîªtfqeªsrikbo^_fifqfbpªqe^q e^sbª_bbkªîiltbaªqlª_rfiaªrmªlsboª^kªbuqbkabaªmboflaªlcª_bkfdkª`lkafqflkp+ªQeb ao^t_^`h)ªeltbsbo)ªfpªqe^qªe^pqvªobpmlkpbpª`^kªe^sbªrkfkqbkabaª`lkpbnrbk`bp) ^kaª`^kªcl`rpªlkªfpprbpªqe^qªe^sbªqebªdob^qbpqªmr_if`ªmolcfib)ª^pªlmmlpbaªqlªqeb jlpqªpfdkfcf`^kqªmo^`qf`îªfjm^`q+ª

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50 The Fundamental Principles of Financial Regulation

Qebªefdeªibsbiªlcªmr_if`ªfkqbobpqªfkªqebªpr_gb`q)ª`lj_fkbaªtfqeªqebªcfk^k`fîªqro* jlfiªlcªqebª`roobkqªòfpfpªjb^kpªqe^qªpljbªâafqflkîªobdri^qflkªlcªcfk^k`fîªpb` * qloªm^vªfpªfkbsfq^_ib+ 116 Fkªte^qªcliiltp)ªtbª^qqbjmqªqlªpbmô^qbªtefèªm^vªmo^`qf`bpªôbª^ªibdfqfj^qb pr_gb`qªcloªcfk^k`fîªobdri^qflkª^kaªtefèªôbªklq+ªFkªifkbªtfqeªqebªobpqªlcªqefp obmloq)ªtbªcl`rpªmofjôfivªlkªfpprbpªqe^qªôbªafob`qivª^ppl`f^qbaªtfqeªcfk^k`fîªpq^ * _fifqv+ª Tbªalªklqª_bifbsbªqe^qª^ªmr_if`ªmbo`bmqflkªqe^qªcfk^k`fîªpb`qloªpîôfbpªôbª]qll efde$ªfpª^ªprccf`fbkqªob^plkªcloªobdri^qflk+ª>ªcobbªjôhbqªpvpqbjªdbkbo^qbpªt^dbp ^kaªmof`bpªabqbojfkbaªqeolrdeªqebªfkqbo^`qflkªlcªprmmivª^kaªabj^ka+ªRkibpp qebobªôbªob^plkpªqlª_bifbsbªqe^qªqebpbªclo `bpªôbªôqfcf`fîivªafpqloqba)ªfkªtefè `^pb)ª^pªtbªôdrbª_bilt )ªqebobªfpª^ª`^pbªcloªmr_if`ªfkqbo sbkqflk)ªqovfkdªqlª`lkqoli m^vªfpªrprîivªfkbccb`qfsbª^kaªcobnrbkqivª`lrkqbomolar`qfsb+2- Jôhbqpªôbªâbmqª^q cfkafkdªt^vpªôlrkaªobdri^qflkpªqe^qª^qqbjmqªqlªcfuªt^dbpª^kaªmof`bpª^qªibsbipªqe^q alªklqª`loobpmlkaªqlªjôhbqªbnrfif_ofrj+ª Qefpªfpªklqªqlªp^vªqebobªfpªklªmr_if`ªmlif`vªfkqbobpqªfkªabîfkdªtfqeªm^vªafpmôf * qfbp+ªCôªcoljªfq+ªPl`fbqfbpªe^sbªabsfpbaªkrjbolrpªqbèkfnrbpªqlªâaobppªqebªfpprb lcªfk`ljbªfkbnrîfqv)ªfkìrafkdªjlpqªfjmloq^kqivªqebªmoldobppfsbªfk`ljbªqû+ªQeb ^_plirqbªibsbiªlcªm^vªfkªqebªcfk^k`fîªpb`qlo)ªfkplcôª^pªfqªo^fpbpªpl`fîªfpprbpªobi^qba qlªfk`ljbªafpmôfqfbp)ªpelriaª_bªabîqªtfqeª_vªqebpbªjbè^kfpjp+ªFkªqefpªobpmb`q) cfk^k`bªfpªklªafccbobkqªcoljª^kvªlqeboªb`lkljf`ªpb`qlo Qebobªôb)ªeltbsbo )ªqtlª^pmb`qpªlcªcfk^k`fîªpb`qloªm^vªqe^qªôbªibdfqfj^qb l_gb`qpªlcªobdri^qlo vªfkqbosbkqflk+ªLkbªobi^qbpªqlª`lkcif`qpªlcªfkqbobpqª^kaªpq^hb * eliaboªmolqb`qflk)ª^kaªqebªlqeboªobi^qbpªqlªpvpqbjf`ªpq^_fifqv + Qeolrdelrqªlroªobmloq)ªeltbsbo )ªtbªôbªfkªbppbk`bªqîhfkdª^_lrqªpl`fîªbuqbo * kîfqfbpªtefèªcloª^ªelpqªlcªob^plkpªôbªklqªprccf`fbkqivªfkqbokîfwbaª_vª_^khp+ ?^khbopÖªobjrkbo^qflkªe^pªfk`lomlo^qbaªfkprccf`fbkqªfkqbokîfwfkdªlcªqebªpl`fî `lpqpªlcªbu`bppfsbªibkafkd+ª?rqªtbª^fjªqlªabîªtfqeªqefpªqeolrdeªlroªâafqflkî `^mfqîªèôdbp+ªQebªobpmlkpbªlcª_^khpªqlªibppªmolcfqpªfkªqebª_lljªpelriaª_bªpjîi* boª_lkrpbp)ªplªqebobªtlriaª_bªibppªkbbaªcloªobdri^qlopªqlªjbaaibªfkªqebªlsboîiªibsbi lcªobjrkbo^qflk+ Pq^hbeliabo molqb`qflk fpprbpªôfpbªtebkª^pvjjbqof`ªfkcloj^qflkªibâpªqlªibsbip lcªobjrkbo^qflkªqe^qªabmôqªcoljªqelpbªqe^qªtlriaªmobs^fiªfkª^ªdbkrfkbivªcobb jôhbqªcloªqîbkq+ªQefpª`^k)ªfkªmofk`fmib)ªl``roªtebkªj^k^dbopªlcª_rpfkbppbpª^tôa qebjpbisbpª`lkqo^`qpªqe^qªôbªjlobªdbkbolrpªqe^kªqebªltkbopªlcªqebª_rpfkbpp tlriaªèllpbªqlª^tôaªfcªqebvªtbobª^tôbªlcªîiªqebªc^`qp+ªQebªjlpqªfjjbaf^qbªprc* cbobopªcoljªprèªmo^`qf`bpªôbªqebªltkbopª%peôbeliabop&ªlcªqebª_rpfkbpp)ª_rqªfkpl * côª^pªbu`bppfsbªm^vªbolabpªqebªmolcfq^_fifqvªlcª^ªcfk^k`fîªcfoj)ª_olâboªcfk^k`fî pq^_fifqvªfpprbpª`^kªîplªôfpb+ Qebª^kptboªqlªqefpªmlqbkqfîªafpqloqflk)ªtbª_bifbsb)ªifbpªfkªpqobkdqebkbaª`loml * o^qbªdlsbok^k`b+ª?lôapªlcªafob`qlopªpelriaªe^sbª`ljmbkp^qflkª`ljjfqqbbpªqe^q ôbª^mmolmof^qbivªobcib`qfsbªlcªpeôbeliaboªfkqbobpqp+ªQefpªjb^kp)ª^qª^ªjfkfjrj) qe^qªprèª`ljjfqqbbpªpelriaª_bª`ljmlpbaªlcªfkabmbkabkqªafob`qlop)ªtfqeªqeb `^m^`fqvªqlªob^èªfkclojbaªgradjbkqpªlkªm^vªibsbipª^kaªpqor`qrobp+ªT bª_bifbsb qe^qªqo^kpmôbk`vªfpªîplª^ªsîr^_ibªp^cbdrôa+ªJbj_bopefmªfkª@ljmbkp^qflk @ljjfqqbbpªpelriaª_bªafpìlpba)ª^kaªpîôfbpª^kaª_bkbcfqªibsbipªcloªîiªpbkfloªbub`* rqfsbpªpelriaª_bªjâbªmr_if`+ª Qlªâaobppªqebªprpmf`flkªqe^qª`ljmbkp^qflkª`lkpriq^kqpªmi^vª^ªolibªfkªo^qèbq * Geneva11_latest.qxp 07/05/2009 16:48 Page 51

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fkdª`ljmbkp^qflkªibsbipªrmtôa)ªqebobª`lriaªîplª_bª^ª`^pbªcloªobnrfofkdªâsf`bªlc `ljmbkp^qflkª`lkpriq^kqpªqlª_bªafsridbaªjlobªtfabiv+ªTbª_bifbsbªqe^qªqebªprmbo* sfplovª^rqelofqfbpªobpmlkpf_ibªcloª`lkar`qªlcª_rpfkbppªobdri^qflkªpelriaªclojri^qb drfabifkbpª`lkpfpqbkqªtfqeªqebpbªmofk`fmibpª^kaªeliaªobdri^qbaªfkpqfqrqflkpªql ^``lrkqªfcªqebvªalªklqªcliiltªqebj+ Lcªjrèªjlobªjljbkqªcoljªlroªmbopmb`qfsb)ªeltbsbo )ªfpªqebªmlqbkqfîªclo objrkbo^qflkªmo^`qf`bpªqlªâsbopbivª^ccb`q pvpqbjf` pq^_fifqv+ªQefpªtfiiªl``roªfcªqeb pqor`qrobªlcªobjrkbo^qflkªbk`lro^dbpªab`fpflkªj^hbopªqlªq^hbªofphpªtelpbªpl`fî `lpqpªafsbodbªcoljªqebª`lpqpªc^`fkdªqebªfkafsfarîªab`fpflkªq^hbo +ªFqªfpªklqªeôaªql qefkhªlcªt^vpªfkªtefèªqefpª`lriaªe^mmbk+ªTebobª^ªcfk^k`fîªpb`qloªab`fpflkªq^hbo ob`bfsbpª^ªmloqflkªlcªqebªmolcfqpªdbkbo^qbaªfkª^kvªqfjbªmbofla)ª_rqªalbpªklqª^_plo_ ^ª`loobpmlkafkdªpeôbªfkªqebªilppbpªdbkbo^qbaªfkªlqeboªqfjbªmboflap)ªeb,pebªe^pª^k fk`bkqfsbªqlªq^hbªâafqflkîªofphp+ªQebªbub`rqfsbªtfiiªl_q^fkªmlqbkqfîivªiôdb obqrokpªfkªdllaªqfjbp)ªtefibªpfjmivªob`bfsfkdªklqefkdªfkª_âªqfjbp+ª Qebobªfpª^ªtfabpmobâª_bifbcªqe^qªqe^qªt^pª^ªdbkboîªcb^qrobªlcªobjrkbo^qflk m^`h^dbpªfkªqebªmboflaªibâfkdªrmªqlªqebªmobpbkqªòfpfp)ªqelrdeªnr^kqfcfbaªbsfabk`b fpªafccf`riqªqlª`ljbª_v+ªFqªfpª`boq^fkivªqorbªqe^qª^ªkrj_boªlcª`ljm^kvª@BLpªob`bfsba iôdbªm^vªm^`h^dbpªarofkdªqebªbum^kpflkªme^pbª^kaªtbobªklqªobnrfobaªqlªdfsbª_^`h qebfoªd^fkpªtebkªqebfoª`ljm^kfbpªo^kªfkqlªafccf`riqfbp+ªFkabba)ªfkª^ªkrj_boªlc `^pbp)ªfqªt^pªobmloqbaªqe^qªqebvªob`bfsbaªâafqflkîªiôdbªpbsbo^k`bªm^`h^dbpªtebk qebvªtbobªbsbkqrîivªclo `baªqlªib^sbªqebfoªmlpfqflkp+ªTe^qªfpªklqªhkltk)ªeltbs * bo)ªfpªte^qªfjm^`qªqefpªeâªlkªfk`bkqfsbpªcloªofph*q^hfkd)ªloªeltªjrèªlcªqebªobjr* kbo^qflkªt^pªfkªclojpªqe^qªfjmlpbaªilppbpªlkªqebªob`fmfbkqªtebkªpql`hªmof`bp mirjjbqba+ª Eltª`^kªpl`fbqvªmolqb`qªfqpbicª^d^fkpqªqebªpvpqbjf`ª`lkpbnrbk`bpªlcªafpqloqba fk`bkqfsbpªfkª`ljmbkp^qflkªpqor`qrobp<ªFqª`^kª_bªôdrbaªqe^qªqebªcfopqªifkbªlc abcbkpbªfpª`ljm^kfbpÖªltkªpbic*fkqbobpq+ªFqªfpªeôaªqlª_bifbsbªqe^qªcfk^k`fîªcfojp hkltfkdivªbk`lro^dbªbu`bppfsbªofph*q^hfkd+ªQebvªmobprj^_ivªqo vªqlªpbqªrmªfk`bk * qfsbªpqor`qrobpªqe^qªifjfqªmbo sbopbªfk`bkqfsbp+ª>kaª`ljmbqfqfsbªmobpprobpªpelria bkprobªqe^qªqebªcfojpªqe^qªôbªjlpqªpr``bppcriªfkªalfkdªqefpªôbªqebªilkd*qbojªpro * sfslop+ªQlªpljbªbuqbkqªqefpªe^mmbkp)ª_rqªqebªjbè^kfpjªfpªpbicªbsfabkqivªfkprccf * `fbkq)ªcloª^qªib^pqªqtlªob^plkp+ª Cfopq)ªfqªfpªsbo vªafccf`riqªcloªqebªltkbopªlcªcfojpª%fbªpeôbeliabop&ªqlªbccb`qfsbiv jlkfqloªqebªfk`bkqfsbpªc^`fkdªj^k^dbop+ªQebvªalªklqªe^sbªqebªfkcloj^qflkªlo bumboqfpb+ª>kaªfkª^ªmolqo^`qbaªmboflaªlcªdllaªqfjbp)ªfqªfpªcôªcoljªìbôªeltªofphv `boq^fkª^`qfsfqfbpª^`qrîivªôb+ªPlªqebªpeôbeliabopªlcª^ªcfojªôbªfkprccf`fbkqivª^tôb lcªqebªofphpª_bfkdªorkª_vªpbkfloªj^k^dbjbkq)ª^kaªpbkfloªj^k^dbjbkqªfkªqrokªj^v _bªfkprccf`fbkqivª^tôbªlcªqebªofphpª_bfkdªorkª_vªqebª_^khbopª^kaªqoâbopªtelpb ^`qfsfqfbpªqebvªlsbopbb+ Qebªpb`lka ob^plkªtevªfqªfpªklqªmlppf_ibªqlªobivªpfjmivªlkªqebªpbic*fkqbobpqªlc cfojpÖªltkbopªfpªqe^qªqebª`lpqpªlcª^kªfkafsfarîª`ljm^kvÖpªc^firobªtfiiªrkabopq^qb qebªpl`fîª`lpqp)ªcloªob^plkpªabsbilmbaªbipbtebobªfkªqefpªobmloq+ªQebªc^firobªlcªlkb cfk^k`fîªfkpqfqrqflkªqvmf`îivªtb^hbkpªqebªmlpfqflkªlcªîiªlqebopª^kaª_ofkdpªqeb molpmb`qªlcªpvpqbjf`ªjbiqaltkªìlpbo+ Cloª_lqeªlcªqebpbªob^plkp)ªtbª^``bmqªqe^qªqebobªfpª^k ^ moflof `^pbªcloªprmbosfpl* ovªfkqbosbkqflkªfkªqebªcfbiaªlcª`ljmbkp^qflkªmo^`qf`bp+ª?rqªte^qªclojªpelriaªprè fkqbosbkqflkªq^hb<ªQebobªfpª^ªìbôªofphªlcªrkfkqbkabaª`lkpbnrbk`bpªfkªpr_gb`qfkd `ljmbkp^qflkªmo^`qf`bpªqlªobdri^qflkª_^pbaªlkªmlifqf`îªmobpprobª^kaªmr_if`ªlmfk * Geneva11_latest.qxp 07/05/2009 16:48 Page 52

52 The Fundamental Principles of Financial Regulation

flk+ªFcªqebª`lkpbnrbk`bªfpªqlª`lkpqo^fkªpîôfbpª_biltªjôhbqªìbôfkdªibsbip)ªqebk mo^`qf`bpªtfiiªpmofkdªrmªqe^qªbsâbªqebª`lkpqo^fkqp+ª>kªbu^jmibªfpªqebªi^tªfkqol * ar`baªfkªqebªRPªfkªqebª.66-pªqe^qªbuìrabaªpîô vªm^vjbkqpªfkªbu`bppªlcª!.ªjfi * iflkªmboªvbôªcoljªbumbkpbpªabar`qf_ibªcloªqûªmromlpbp+ªQebª`lkpbnrbk`bªt^pªqeb absbilmjbkqªlcªfk`bkqfsbª`ljmbkp^qflkªqbèkfnrbpª%prèª^pªm^vjbkqªfkªobpqof`q * baªpql`hª^kaªlmqflkp&ªqe^qªobkabobaªqebªfkqbkabaªpîô vªobpqo^fkqªfkbccb`qfsb)ª^ka qe^qªeâªqebfoªltkªmbo sbopfqfbp+ Plªqebªnrbpqflkªfpªte^qªhfkapªlcªobdri^qlo vªoribpªloªdrfabifkbpªtlriaªfjmolsb qebªfk`bkqfsbªpqor`qrobªlcªbub`rqfsbªm^vªfkªqebªcfk^k`fîªpb`qlo +ªTbª`lkpfaboªebob cfsbªmlppf_ibªqbèkfnrbp7 Qebªcfopq obi^qbpªqlªqebªt^vªfkªtefèª_lkrpbpªôbªm^fa+ªFqªpelriaª_bªcb^pf_ibªql obnrfobªabi^vbaªm^vjbkqªlcª_lkrpbp)ªqlªj^ka^qbªqebªdob^qboªrpbªlcªm^vjbkqªfk `ljm^kvªpql`h)ª^kaªqlªobnrfobªqebªsbpqfkdªlcªqefpªpql`hªcloªilkdboªmboflap+ªTbªprm* mloqªqebpbªqbèkfnrbp)ªmôqf`riôivªcloªpbkfloªbub`rqfsbpªtelpbªab`fpflkpª^ccb`qªqeb lsboîiªebîqeªlcªqebª`ljm^kv +ª?rqªtbª`^rqflkªqe^qªqllªjrèªpelriaªklqª_b bumb`qbaªlcªqebpbªobclojp+ªJ^kv)ªfkabbaªjlpq)ªcfk^k`fîª`ljm^kfbp)ªe^sbªcliiltba prèªmo^`qf`bpªcloªnrfqbª^ªilkdªqfjb+ª >ª pb`lka qbèkfnrbªobi^qbpªqlªqebªt^vªfkªtefèª_lkrpbpªôbª`î`ri^qba+ Bjmilvbbªfk`bkqfsbª`ljmbkp^qflkªpelriaª_bªqfbaªpqof`qivªqlªofph*âgrpqbaªobqrokp+ Ebobªqll)ªeltbsbo )ªfqªtlriaª_bª^ªjfpq^hbªqlªbumb`qªqllªjrè+ªJlpqª`ljm^kfbp îobâvª^qqbjmqªqlªjb^probªofph*âgrpqbaªobqrokp7ªqebªmol_ibjªifbpªfkªqebªafccf`ri * qfbpªlcª`î`ri^qfkdªofph+ªJb^probaªofphªrprîivªpbbjpªiltª^qªqebªebfdeqªlcª^ª_lljªpl qe^qª^`qrîªofphªfpªrkabobpqfj^qba+ªJloblsbo)ªbsbkªfcªqoâbopªôbªobtôabaªlkª^ªofph* âgrpqbaª_^pfp)ªqebvªj^vªpqfiiªe^sbª^kªfk`bkqfsbªqlªq^hbªbu`bppfsbªofph+ªPvpqbjf`ªofph fpªpljbqefkdªqe^qªj^qbofîfwbpªlkivªfkcobnrbkqiv +ªQoâbopª^kaªlqebopªtfiiª_bkbcfq coljªq^hfkdªbu`bppfsbªofphªfkªîiªqebªvbôpªtebkªofphªalbpªklqªj^qbofîfwb)ª^kaªtfii klqªprccboª`loobpmlkafkdªilppªfkªvbôpªtebkªj^gloªobsbopbpªl``ro + >ªqefoa ^mmol^èª^qqbjmqpªqlªbnrîfwbªqebª_î^k`bªlcªobqrokpª^kaªilppbpªqeolrde ]ì^t*_^`h$ªmolsfpflkpªfkª_lkrpª^tôap+ª?lkrpªm^vjbkqpª`lriaª_bªmi^`baªfkª^k bpòltª^``lrkq)ª^kaªlkivªobib^pbaª^cqboª^ªprfq^_ibªmboflaªeâªm^ppba)ªarofkdªtefè klªilppbpªeâª_bbkªob`loaba+ªFcªprèªilppbpªafaªl``ro)ªqebªbjmilvbbpªì^fjpªlkªqeb `ljmbkp^qflkª_î^k`bªebiaªfkªbpòltªtlriaª_bªobar`baª^``loafkdiv +ª>pªb`lkl * jfpqp)ªqefpª^mmbîpªqlªrpªlkªfk`bkqfsbªdolrkap)ªqelrdeªtbªalr_qªfqpªmo^`qf`îfqv ^kaªbsbkªfqpªibdîªbkclo `b^_fifqv+ªPfk`bªprèªmolsfpflkpªtlriaªl_sflrpivª_bªrk^q * qo^`qfsbªqlªbjmilvbbp)ªqebª`lkpbnrbk`bªtlriaªmobprj^_ivª_bªbsbkªefdeboª_lkrp * bpªqlª`ljmbkp^qbªcloªqebª^qqbka^kqªrk`boq^fkqv+ >ªclroqe ^mmol^èªfpªqlªobar`bªqebªfk`bkqfsbªcloªofphªq^hfkdª_vªfkafsfarîªab`f * pflkªq^hbop+ªCloªbu^jmib)ªfqªe^pª_bbkªprddbpqbaªqe^qª_lkrpbpªpelriaª_bª_^pbaªlk cfoj*tfabªmbocloj^k`b)ªo^qeboªqe^kªqebªmbocloj^k`bªlcªfkafsfarîpªloªqebfoª_rpf * kbppªrkfqp+ªTbªe^sbªpljbªalr_qpª^_lrqªqebªbccb`qfsbkbppª^kaªabpfo^_fifqvªlcªqefp+ Fqªtlriaª`boq^fkivªobar`bªqebªfk`bkqfsbªqlªq^hbªofphpªfkªfkafsfarîª^`qfsfqfbp+ª?rqªfq tlriaªiôdbivªrkabojfkbªqebªmromlpbªlcªfk`bkqfsbªm^v +ªCroqebojlob)ªfqªjfdeq ^mmbôªfkbnrfq^_ibªfkª^ªjriqf*crk`qflkîªcfoj)ªfcªbjmilvbbpªfkª^ª_rpfkbppªrkfqªqe^q t^pªpr``bppcriªeâªqebfoªm^vªobar`baª_b`^rpbªlcªqebªibppªpr``bppcriª^`qfsfqfbpªlc ^klqeboª_rpfkbppªrkfq+ªFqªj^vªbsbkªibâªqlªqebªbjbodbk`bªlcªpjîibo )ªjlobªpmb * `fîfwbaªcfojpªqe^qªtlriaªalªifqqibªqlªè^kdbªpvpqbjf`îivªa^kdbolrpª_be^sflro)ª_rq tlriaªj^hbªqebªcfk^k`fîªpvpqbjªbsbkªeôaboªqlªl_pbo sb+ª Qebªcfcqe ^mmol^èªpbbhpªqlªrqfifwbªqebªèb`hpª^kaª_î^k`bpªlcª`lomlo^qbªdlsbo * Geneva11_latest.qxp 07/05/2009 16:48 Page 53

Other Regulatory Issues 53

k^k`bªqlª_ofkdªfkafsfarîª^kaª`lomlo^qbªfkqbobpqpªfkqlª_bqqboªîfdkjbkq+ªFkqbokî `ljmbkp^qflkª`ljjfqqbbpª`lriaª_bªobnrfobaªqlªe^sbªofphª`lkqoliªpq^ccª^pªbuªlccf`fl jbj_bop)ª^kaªprèªpq^ccª`lriaª_bªdfsbkªsbqlªmltbopªlsboª`ljmbkp^qflkªpqor`qrobp abbjbaªqlª_bªqllªofphv+ Fkªte^qªclojªpelriaªobdri^qflkªlsboªm^vª_bªfkqolar`ba<ªT bªe^sbªbipbtebob bumobppbaª^ªmobcbobk`bªcloª]_ofdeqªifkb$ªoribpªqe^qªifjfqªprmbo sfplovªafpòbqflk)ªlk qebªdolrkapªqe^qªfqªfpªeôaªcloªprmbosfplopªqlªfjmlpbªafpòbqflkôvªoribpªfkªqfjbpªlc dbkboîªbrmelof^+ªFkªqebª`^pbªlcª`ljmbkp^qflk)ªeltbsbo )ªtbªpbbªifqqibªîqbok^qfsb _rqªqlªobivªlkª^ªjb^probªlcªprmbo sfplovªafpòbqflk+ªT bª_bifbsbªqe^qªprmbo sfplop pelriaªclojri^qbª^ªpbqªlcªobjrkbo^qflkªdrfabifkbp)ª_^pbaªlkªqebªmofk`fmibpªpbqªlrq ^_lsb)ª^kaª^ppbppªqebªabdobbªlcª`ljmif^k`bªlcªb^èªprmbosfpbaªfkpqfqrqflk+ªRpfkdª^ obi^qfsbivªpfjmibªp`îbª%bd+ª]criivª`ljmif^kq$)ª]iôdbivª`ljmif^kq$ª^kaª]môqfîiv `ljmif^kq$)ª%tefèª`lriaª_bªmr_ifpeba&ª^rqlj^qf`ªâgrpqjbkqpªtlriaª_bªjâbªql `^mfqîªo^qflp+ªQelpbªfkpqfqrqflkpªqe^qªtbobªgradbaªqlªe^sbª`ljmbkp^qflkªmo^`qf`bp qe^qªc^fibaªqlªobpqo^fkªbu`bppfsbªofphªq^hfkdªtlriaªqebobclobªm^vª^ªmbkîqvªfkªâaf * qflkîªobnrfobaª`^mfqî+ª

6.3 Loan-to-Value Ratios in Mortgages

Qebªbmf`bkqobªlcªqebªcfk^k`fîªòfpfpªl``roobaªfkªqebªelrpfkdªjôhbq)ªbpmb`fîiv)ª_rq klqªlkiv)ªfkªqebªRP>ª^kaªRH+ªQebª_llj,_rpqª`vìbªt^pªbu^`bo_^qbaª_vªqebª`lkaf * qflkpªcloªjloqd^dbªibkafkdª_b`ljfkdªbsboªb^pfboªfkªqebª_lljª^kaªqfdeqbkfkdªfk qebª_rpq+ªQefpªt^pªmôqf`riôivªplªcloªil^k*ql*sîrbª%I QS&ªo^qflp+ªQ fjbª^kaªpq^qb* sôvfkdªIQSpªe^sbª_bbkªrpbaªpr``bppcriivªfkª`lrkqofbpªprèª^pªBpqlkf^ª^kaªElkd Hlkd+ Qebvª`^k)ªeltbsbo)ª_bªb^pfivª^slfabaªfkªjlpqª`fo `rjpq^k`bpª_vªq^hfkdªlrqªpb` * lkaªjloqd^dbpªloªolrqfkdªqebªjloqd^dbª_looltfkdª^_olâ+ªPrèª^slfa^k`bª`^kª_b afp`lro^dba)ª^pªfpªalkbªfkªpbsboîªBrolmb^kª`lrkqofbp)ª_vªifjfqfkdªqebªofdeqªlcª^ ibkaboªqlªobmlppbppªmolmboqvªqlªcfopqªifbkpªob`loabaªfkª^ªobdfpqboªhbmqªtfqefkªqeb `lrkqov+ªPlªpb`lkaªpb`robaªjloqd^dbpª`^kª_bªmobsbkqbaª^pªtbiiª^pªcfopqªjloqd^dbp jâbª^_olâ)ª_rqªklqªob`loabaªil`îiv)ªpfk`bªqebvªtlriaª_b)ªfkªbccb`q)ªrkpb`roba+ª Obploqªqlªibdîªmolef_fqflkªfkªqefpªc^peflkªfpªrkabpfo^_ib+ªKbsboqebibppªqebªfjmb* qrpªqlªqebªelrpfkdª`vìbª`^rpbaª_vªqebª`ljmbqfqfsbªo^qèfkdªrmªlcªI QSpªfkªqeb _lljª%lcqbkªqlª.--()ªb+d+ªKloqebokªOl`h&)ª^kaªqebfoª^_ormqªabìfkbª%lcqbkªql ôlrkaª42"&ªfkªqebª_rpq)ªe^pª_bbkªiôdb+ªQebªibppboªbsfiªj^vª_bªcloªqebª@bkqoî ?^khªqlªpbqª^ªjûfjrjªI QS)ªp^vª6-")ª^kaªbsbkªqlªiltboªfqªpelriaªelrpbªmof`b fkòb^pbpª^mmbôªqlª_bªdbqqfkdªlrqªlcªe^ka+ª@^kâf^kªi^t )ªcloªbu^jmib)ªpmb`fcfbpª^ jûfjrjªIQSª%5-"&ª^kaªqebªjloqd^dbªjrpqª_bªlkªqebªmofk`fmîªobpfabk`b+ Jlobªdbkboîiv)ªqebªRPªobdri^qlopªôbªmolmlpfkdªqebªòb^qflkªlcª^ªpbmô^qbªjloq* d^dbªlofdfk^qflkª^rqelofqvªqe^qªtlriaªpbqªpq^kaôapªcloªprèªlofdfk^qflk+ªT b _bifbsbªqefpªtlriaª_bª^ªsîr^_ibªfkkls^qflk)ªqe^qª`lriaªrpbcriivª_bª`lmfbaª_vªlqebo `lrkqofbp+ªª>mmolmof^qbªjloqd^dbªlofdfk^qflkªpq^kaôapªtlriaª`ro_ª^_rpbpª^ka ifjfqªqebªbuqbkqªqlªtefèªrknrîfcfbaª_rvbopªtbobªbk^_ibaªqlª_faªrmªelrpfkd mof`bpªlkªqebª_^pfpªlcªiûªibkafkdªpq^kaôap+ªQebobªôbªîplªlqeboª^pmb`qpªlcªRP)ª^ka lqeboª`lrkqo v)ªjloqd^dbªjôhbqpªqe^qª`lriaª_bkbcfqªcoljªob`lkpfabo^qflk)ªclo bu^jmibªjlsfkdª^t^vªcoljªklk*ob`lropbªjloqd^dbpª^kaªfkqbobpqªabar`q^_fifqv +ª Geneva11_latest.qxp 07/05/2009 16:48 Page 54

54 The Fundamental Principles of Financial Regulation

6.4 Credit Rating Agencies

@obafqªO^qfkdª>dbk`fbpªe^sbªilpqªjrèªlcªqebfoªobmrq^qflkªfkªqefpªòfpfp)ªj^fkivª^p ^ªobpriqªlcªdfsfkdªefdeªfkfqfîªo^qfkdpªqlªpb`rofqfwbaªjloqd^db*_^`hbaªpb`rofqfbpªqe^q ^cqboªqebªbsbkqª^mmbôªqlªe^sbª_bbkªtolkd+ªQebvªôbªtfabivª^``rpbaªlcªkbcôflrp _be^sflro)ªklq^_ivªsf^ª^ª`lkcif`qªlcªfkqbobpq)ªpfk`bªqebvªdbqªm^faª_vªqebªfpprbopªlc pb`rofqfbpª%qebªpbiiªpfab&)ªtelªk^qroîivªt^kqªefdeboªo^qfkdp+ªTbªqbkaªqlªqefkhªqe^q qefpªmôqf`riôªòfqf`fpjªfpªbu^ddbo^qba+ª@obafqªo^qfkdª^dbk`fbpªe^sbª^ªco^kèfpb sîrbªqe^qªabmbkapªlkªl_gb`qfsbªlmfkflkp+ªQefpªtlriaª_bªrkabojfkbaªfcªqebvªtbob hkltkªqlªpeâbªqebfoª^ppbppjbkqªfkªloaboªqlªd^fkª_rpfkbpp+ª Te^qªfpªlcªdob^qboª`lk`bokªfpªqebª`lkcif`qªlcªfkqbobpqªqe^qªôfpbpªfkªqebªâsfplo v _rpfkbppªlcª@O>p+ªQebªâsfplovªôjpªlcª@O>pªebimªmlqbkqfîªfpprbopªpqor`qrobªlccbop fkªprèª^ªt^vª^pªqlªd^fkª^ªabpfobaªo^qfkd+ªE^sfkdªâsfpbaª^kªfpprboªlkªab_qªpqor` * qrob)ªfqªfpªeôaivªifhbivªqe^qªqebªo^qfkdªôjªlcªqebª@O>ªtlriaªc^fiªqlªdo^kqªqebªmolj* fpbaªo^qfkd+ªTbªqebobclobªc^slroªqebªibdîªpbmô^qflkªlcªo^qfkdpª_rpfkbppªcoljªo^q * fkdpªâsfplo vªpbo sf`bp+ªTbªîplªc^slroªbke^k`baªqo^kpmôbk`vª^_lrqªqebªt^vªfk tefèª@O>pª^ppbppªqebªòbafqtloqefkbppªlcªpqor`qrobaªmolar`qp+ªTe^qªtbªalªklq c^slro)ªeltbsbo)ªfpªclojîªlsbopfdeqªlcªqebªo^qfkdpªmol`bpp+ªQefpªtlria)ªtbª_bifbsb) qbkaªqlªdfsbªqllªjrèªlcª^kªlccf`fîªbkalopbjbkqªqlªo^qfkdp+ª O^qeboªqe^kª^``rpfkdª@O>pªlcªpeômªmo^`qf`b)ªlroªsfbtªfpªo^qeboªqe^qªqebª@O>p c^fibaªqlª^mmob`f^qbªqebªifhbifellaªqe^qªRPªelrpfkdªmof`bpªjfdeqªabìfkbª^òlppªqeb _lôa)ª^kaªqebªbuqbkqªqe^qªmol_^_fifqfbpªlcªabc^riqª`lriaªjfdo^qbªrmtôapªfkªqe^q bsbkq+ªJlpqªclob`^pqbopªe^sbªeâªmllo )ªèbnrbobaªob`loapªlsboªqebªi^pqªqtlªvbôp+ @O>pªôbªgrpqª^klqeboªdolrmªlcªclob`^pqbop)ª^kaªqebvªe^sbªalkbªgrpqª^pª_âiv +ª >kvelt)ªtebqeboªqebª@O>pªtbobªhk^sbpª%`lkcif`qªlcªfkqbobpq&ªloªcllipª%mlloªclob* `^pqbop)ªifhbªjlpqªlqeboªclob`^pqbop&)ªqebªnrbpqflkªfpªte^qªqlªalª^_lrqªqebfoªolibªfk qebªdbkboîª`lkar`qªlcªobdri^qflk+ªQ fdeqbkfkdªrm)ªvbqªcroqebo )ªlkªmlqbkqfîª`lk * cif`qpªlcªfkqbobpq) 2. ^ka)ªvbqªjlob)ªqo^kpmôbk`vªfkª_lqeªjbqelapª^kaªobpriqpªfpªîi sbovªtbii8ªqebªdob^qboªmol_ibjªfpªqe^qªqebªo^qfkdpªmolsfabaª_vª%cîif_ib&ª@O>p)ªrpfkd cîif_ibªjlabip)ªe^sbª_bbkªmi^`baª^qªqebª`bkqobªlcªqebªobdri^qlo vªmol`bppªfqpbic)ªclo bu^jmibªqebª?^pbiªFFªPq^kaôafpbaª>mmol^è+ª>kaªdfsbkªqebªpqo^qbdf`ª_be^sflro qe^qªo^qfkdªafpìlprobpª`^kªdbkbo^qb)ªmi^`fkdª@O>pª^qªqebª`bkqobªlcªobdri^qflkªj^v e^sbªâabaªqlªqebfoªcîif_fifqv+ª Fkªqefpªi^qqboªobdôaªqebobªôbªqtlªîqbok^qfsbªdbkbof`ª^mmol^èbp+ªQebªcfopqªfpªql objlsbª@O>pª^kaªqebfoªo^qfkdpª^pªcôª^pªmlppf_ibªcoljªqebªpqor`qrobªlcªclojîªobd * ri^qflkªîqldbqebo+ªFksbpqjbkqªj^k^dbopª^kaª_^khbopªpelriaªq^hbªobpmlkpf_fifqv cloªqebfoªltkªab`fpflkp)ª^kaªqebvª%^kaªqebfoªobdri^qlop&ªpelriaªklªjlobª_bªîiltba qlªefabª_befkaª@O>ªclob`^pqpªqe^k)ªcloªbu^jmib)ª_befkaªdlsbokjbkqªclob`^pqpªlc crqrobªdoltqe+ Qebªîqbok^qfsb)ªpb`lka)ª^mmol^èªfpªqlªobdfpqboª^kaªqlªobdri^qbªqebª@O>p)ª_rqªql ib^sbªqebjªtfqeª^ª`bkqoîªolibªfkªqebªobdri^qlo vªmol`bpp+ Lroªmobcbobk`bªfpªcloªqebªcfopqª^mmol^è+ªObdri^qflkªtfiiªklqªj^hbªqebª@O>pªclob* `^pqª_bqqbo8ª_rqªtfiiªjb^kªqe^qªqebª^rqelofqfbpªtfiiª_bª`lkglfkbaªfkªqebªobpriqfkd `lkabjk^qflkª^pª^kaªtebkªqebª@O>pªdbqªfqªtolkdªfkªcrqrob)ª^pªqebvªfkbsfq^_iv tfii+ªJloblsbo)ªdlsbokjbkqpªôbªqebjpbisbpªiôdb*p`îbªfpprbopªlcªab_q+ªJfdeqªdls* bokjbkqªobdri^qflkªqobpm^ppªlkªqebª%co^dfib&ªfkabmbkabk`bªlcª@O>pªtebkªfqª`ljbp qlªo^qfkdªprèªab_q< Geneva11_latest.qxp 07/05/2009 16:48 Page 55

Other Regulatory Issues 55

6.5 Centralized Clearing House Arrangements vs. OTC Markets

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6.6. Year-end Spikes

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56 The Fundamental Principles of Financial Regulation

6.7 Crisis Management

B^èª]fkafsfarîivªpvpqbjf`$ªcfk^k`fîªfkpqfqrqflkªpelriaª_bªobnrfobaªqlªmolsfabª^k ^kkrîª`lkqfkdbk`vªmi^kªcloªabîfkdªtfqeªfqpªltkª_^khormq`v +ªQebª`lkqfkdbk`v mi^kªpelriaªfkìrabªmol`barobpªeltª_bpqªqlªrktfkaªbufpqfkdªmlpfqflkpª^kaªl_if * d^qflkp+ªPmb`fîªbjme^pfpªpelriaª_bªmi^`baªlkªqebªmlqbkqfîªofphªpmfiilsbopªqlªlqebo cfk^k`fîªfkpqfqrqflkpª^kaªqebªb`lkljvª^pª^ªtelib+ Geneva11_latest.qxp 07/05/2009 16:48 Page 57

7 The Structure of Regulation

>ªpbkpf_ibªjûfjªfkªqefpªcfbiaªfpªqlªabcboªabibd^qflkªlcªobpmlkpf_fifqvªqlª^kªfkpqf * qrqflkªcloª^èfbsfkdªpljbªl_gb`qfsbªrkqfi)ª^kaªrkibpp)ªlkbª`^kªîplªbnrfmªqe^q fkpqfqrqflkªtfqeªprccf`fbkqªmltbopª^kaªfkpqorjbkqpªqlª^èfbsbªqe^qªbka+ªQebobªe^p _bbkªpljbªqbkabk`vªfkªqebªm^pqªqlªîil`^qbªobpmlkpf_fifqvªcloªcfk^k`fîªpq^_fifqvªql @bkqoîª?^khpªtfqelrqªarbª`lkpfabo^qflkªlcªte^qªfkpqorjbkqpªqebvªjfdeqªrpbªql ^èfbsbªqe^qªl_gb`qfsb+ Qebªlkbªfkpqorjbkqªqe^qªqebvª`lriaªtfbia)ªqebªpeloqªqbojªfkqbobpqªo^qb)ªe^pª_bbk mobaf`^qbaªqlªqebª^èfbsbjbkqªlcª%dllapª^kaªpbosf`bp&ªfkci^qflk+ªQebªob`bkqªmbofla lcªcfk^k`fîªqrojlfiªe^pªo^fpbaªnrbofbpªtebqeboªqebªmofjô vªqôdbqªlcªmof`bªpq^_fif * qvªpelriaª_bªtfabkbaªqlªfkìrabª^ppbqªmof`bp+ªTefibªtbªalªprddbpqªqe^qª^kª^mmol * mof^qbªjb^probªlcªelrpfkdªmof`bpªpelriaª_bªfkªqebªmof`bªfkabuªrpbaªcloªqebªfkci^ * qflkªqôdbq)ªtbªalª_bifbsbªqe^q)ªtebobsboªmlppf_ib)ª^ªpbmô^qbªl_gb`qfsbªpelriaª_b ^èfbsbaª_vª^ªpbmô^qbªfkpqorjbkqª%qebªQfk_bodbkªmofk`fmibªlcªobi^qfkdªfkpqorjbkqp qlªqôdbqp&+ªQerpªqebªl_gb`qfsbªlcªcfk^k`fîªpq^_fifqvªpelriaª_bª^èfbsbaª_vªqeb absbilmjbkqª^kaª^mmif`^qflkªlcªfkpqorjbkqpªabpfdkbaªcloªqe^qªmromlpb+ªLcª`lropb qebªrpbªlcªbfqeboªfkpqorjbkq)ªfkqbobpqªo^qbpª^kaªj^òl*morabkqfîªobdri^qlovªjb^p* robp)ªtfiiª^ccb`qªqebª`lkgrk`qrobªfkªtefèªqebªlqeboªlmbo^qbp+ªªFkabba)ªfkª`fo `rj* pq^k`bpªtebkªnr^kqfq^qfsbªb^pfkdªfpª_bfkdªrpba)ªqebªqtlªfkpqorjbkqpªj^vªjbodbªql _b`ljbªîjlpqªfkafpqfkdrfpe^_ib+ªª?rqªtbªalªklqªsfbtªqefpª^pª^ªpboflrpªmol_ibj+ Fqªe^pª_bbkª^ªmofjô vªmromlpbªlcªqefpªm^mbo )ªfkªpb`qflkpª0ªqlª2ªqlªphbqèªlrq j^òl*morabkqfîªfkpqorjbkqpªqe^qª`^kª_bªrpbaªfkªqefpªt^v +ªTbªifhbªqlªqefkhªqe^q tbªe^sbªmolmlpbaª^ªprccf`fbkqªôjlro v+ª>kªfjmloq^kqªnrbpqflkªfpªqebª_î^k`b _bqtbbkªafpòbqflkª^kaªoribpªfkªqebfoª^mmif`^qflk+ªQebªjlobªqe^qªqebªrqfifp^qflkªlc prèªfkpqorjbkqpªfpªifhbivªqlªmolslhbªlmmlpfqflkªcoljªj^gloªfkqbobpqªdolrmpª^qªqeb qfjbªlcªqebfoª^mmif`^qflk)ªqebªjlobªprèª^mmif`^qflkªkbbapªqlª_bª_^pbaªlkªmob*pbq) mob*^kklrk`ba)ª%bsbkªpq^qrqlo v&ªoribp+ªÖQ ^hfkdª^t^vªqebªmrkè*_lti)ªgrpqªtebk qebªmôqvªdbqpªdlfkdÖªfpªklªjlobªmlmriôªtfqeªobpmb`qªqlª^ppbqªmof`bª_lljp)ªqe^kªql qebªj^òl*b`lkljf`ª`lkgrk`qrob+ªCloªqefpªi^qqboªob^plkªtbªtlriaªâsl`^qbªqe^q jrèªlcªqebª`lrkqbo*`vìf`îªôjlro vªqe^qªtbªe^sbªprddbpqbaª_b`ljbpª`lrèba fkªmobprjmqfsb)ªorib*_^pbaªqbojp+ Qeolrdelrqªtbªe^sbªbjme^pfwbaªqebªafccbobk`bpª_bqtbbkªj^òl*morabkqfî ^kaªjfòl*morabkqfîªobdri^qlo vªjb^probp+ªPrèªafccbobk`bpªbuqbkaªk^qroîivªql qebªbqelp)ªafp`fmifkbª^kaª`riqrobpªlcªqebªfkpqfqrqflkpªfkslisba+ªQebªj^òl*morabk* qfîªfkpqfqrqflkªpelriaª_bªj^òl)ª^ddobd^qb)ªpvpqbjf`ª^kaªb`lkljf`ªfkªlrqillh8ªqeb jfòl*morabkqfîªfkpqfqrqflk%p&ªpelriaª_bªjlobªjfòl)ªfkafsfarî)ªmorabkqfî)ªibdî ^kaª^``lrkqfkd*_^pba+ªQefpªfpªìlpbivªfkª^``loaªtfqeªqebªRPªQob^prov)ªÖ?irbmofkqªclo

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58 The Fundamental Principles of Financial Regulation

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The Structure of Regulation 59

qebªqrkb+ªPlªilkdª^pªqebªJfkfpqboªlcªCfk^k`b)ª^kaªk^qflkîªqûm^vbop)ªôbªriqfj^qbiv ^qªofphªlcªkbbafkdªqlªm^vªlrqªjlkbvªcoljªqebªobpriqpªlcªobdri^qlovªc^firob)ªqebvªtfii t^kqªqlªabpfdkª^kaª`lkqoliªqebfoªltkªobdri^qlo vª^kaªprmbosfplovªmol`barobp)ª^ka ofdeqivªpl+ ?rqªte^qª^_lrqªBrolmb)ªtebobªqebªl_gb`qfsbªfpª^ªpfkdibªcfk^k`fîªpvpqbj<ª@ofpfp j^k^dbjbkqª`^kª_bªerdbivªbumbkpfsb)ª^pªe^pª_bbkªpbbk+ª>pªpllkª^p)ª_rqªklq _bclob)ªqebªcbaboîª`bkqobªdbqpªqebªmltboªqlªo^fpbªcrkapª%riqfj^qbivªsf^ªqû^qflk&ªql rkaboq^hbªprèªòfpfpªj^k^dbjbkq)ªqebkªprmbosfpflkª`^kª_bªqo^kpcboobaªqlªqebªcba* boîª`bkqob)ª^kaªqebªbrol*wlkbªorkªcloªobdri^qlo vª^kaªcfk^k`fîªpq^_fifqvªmromlpbp ^pª^ªpfkdibªcfk^k`fîªbkqfqv+ª>_pbkqªprèª^ªcfp`îª`bkqoîfp^qflk)ªtefèªqebª^rqelop lcªqefpªm^mboªtlriaªifhbªqlªe^mmbk)ªqebªcfp`îªmltbop)ªòfpfpªj^k^dbjbkq)ªprmbo sf* pflkª^kaªqebªmolqb`qflkªlcªk^qflkîªcfk^k`fîªpvpqbjpªobj^fkª^qªqebªk^qflkªpq^qb ibsbi)ª%^pªe^pª_bbkªpbbkªfkªmo^`qf`bªfkªqefpªòfpfp&)ª^kaªqebªabpfdkªlcªobdri^qflkªe^p qlªobcib`qªqefp+22 >iqelrdeªòfpfpªj^k^dbjbkqªe^pªqlª_bªalkbª^qªqebªk^qflkªpq^qbªibsbi)ª^_pbkqª^ pefcqªlcªcfp`îª`ljmbqbk`bªcloªqefpªmromlpbªqlªqebªprmo^*k^qflkîªobdflk)ªqebob obj^fkª`lkpfabo^_ibªrpbcriªlmmloqrkfqfbpªcloªfkqbok^qflkîª`llmbo^qflkªfkªòfpfp mobsbkqflk+ >qªmobpbkq)ªfkqbok^qflkîª`llmbo^qflkªfpª`ôofbaªlkªqeolrdeª^ªkbqtlohªlcªprmbo * sfplovª`ljjfqqbbpª^kaªqeolrdeªfkqbok^qflkîªlod^kfw^qflkpªprèª^pªqebª?FP)ªqeb FJCª^ka)ªmôqf`riôiv )ªqebªCfk^k`fîªPq^_fifqvªClorjª%CPC&+ªPb`qloîªprmbo sfplov `ljjfqqbbpªe^sbª^ªefpqlovªpqobqèfkdª_^`hªlsboªqefoqvªvbôp+ªQebª?^pbiª@ljjfqqbb lkª?^khfkdªPrmbo sfpflkªt^pªclojbaªfkª.641ªrkaboªqebª^bdfpªlcªqebªD.-ª`bkqoî _^khªdlsboklopªfkªqebªt^hbªlcªqebªEbopq^qqªòfpfp+ªFqpªlofdfkîªdlîªt^pªqlªìôfcvªqeb ôb^pªlcªobpmlkpf_fifqvªlcªeljbª^kaªelpqªprmbo sfplopªtebobªqebobªt^pª^ªc^firobªlc ^kªfkqbok^qflkîivª^`qfsbª_^kh+ªPr_pbnrbkqiv )ªeltbsbo)ªqebª@ljjfqqbbª_b`^jb qebªplro`bªlcªprmbosfplovªorib*j^hfkdªjlobªdbkboîiv+ªFqªfpªkltª_bpqªhkltkªcloªpbq* qfkdªjfkfjrjª`^mfqîªpq^kaôaªcloªfkqbok^qflkîivª^`qfsbª_^khpª%]?^pbiªF$ª^ka ]?^pbiªFF$&+ª>iqelrdeªkbdlqf^qbaªlkivª^jlkdªD.-ªobdri^qlopª^kaª`bkqoîª_^khp) qebpbªpllkª_b`^jbªdil_îªpq^kaôap+ª Fkqbok^qflkîª`llmbo^qflkªfkªqebªpb`rofqfbpª^kaªfkpro^k`bªcfbiapªqllhªilkdboªql òvpqîifwb)ªcloª_lqeªmlifqf`îª^kaªefpqlof`îªob^plkp+ªQebobªt^pªklª]òfpfp$ªfkªqebpb pb`qlopªqlªclo`bª`llmbo^qflk8ªqebobªt^pªklªmob*bufpqfkdª_lav)ªprèª^pªqebªD.-ª`bk* qoîª_^khªDlsboklopÖª`ljjfqqbb)ªqlª^`qª^pª^ª`lksbkfkdª^rqelofqv8ª^kaªqebªobpmlk * pf_fifqvªcloªfkpro^k`bª^kaªpb`rofqfbpªobdri^qflkªt^pªdbkboîivªjlobªco^djbkqba+ Pqfii)ªcliiltfkdªqebªjlabiªlcªqebª_^khfkdªobdri^qlop)ª`llmbo^qfsbª`ljjfqqbbpªlc pq^kaôaªpbqqbopªtbobªpbqªrmª_vªqebªFkqbok^qflkîªLod^kfp^qflkªlcªPb`rofqfbpÖ @ljjfppflkpª%FLP@L&ª^kaªqebªFkqbok^qflkîª>ppl`f^qflkªlcªFkpro^k`bªPrmbosfplop %F>FP&+ Qebªkbbaªcloª^ªjlobªclojîªfkqbok^qflkîª_lavªqlªq^hbªlsboîiªobpmlkpf_fifqvªclo dil_îªcfk^k`fîªpq^_fifqv)ª^kaªqlª_ofkdªqldbqeboªqebªobibs^kqªk^qflkîª^rqelofqfbp) t^pªob`ldkfwbaªfkªqebªt^hbªlcªqebª>pf^kªòfpfp+ªQebªD4ªjfkfpqbopª^kaªdlsboklop bpq^_ifpebaªqebªCPCªfkª.666)ª`ljmofpfkdª@bkqoîª?^khªAbmrqvªDlsboklop)ªAbmrqv Cfk^k`bªJfkfpqbopª^kaªebâpªlcªobdri^qflkªcoljªD4ª`lrkqofbp)ªîlkdªtfqeªpbkflo obmobpbkq^qfsbpªlcªqebªj^fkªfkqbok^qflkîªfkpqfqrqflkp+ªPr_pbnrbkqiv)ªmôqf`fm^qflk t^pªbuqbkabaªqlª^ªcbtª`lrkqofbpªlrqpfabªqebªD4ªtfqeªfjmloq^kqªcfk^k`fîªjôhbqp+ %Qebª@e^foj^kªlcªqebªClorjªfpª^mmlfkqbaªfkª^ªmboplkîª`^m^`fqv8ªlkbªlcªqeb ^rqelopªlcªqefpªobmloqªpbo sbaª^pªqebªcfopqª@e^foj^k&+ Geneva11_latest.qxp 07/05/2009 16:48 Page 60

60 The Fundamental Principles of Financial Regulation

>iqelrdeªqebªCPCªe^pªalkbªjrèªrpbcriªtloh)ª^kaªbpq^_ifpebaªìlpboªobi^qflk * pefmpª^jlkdªhbvªobdri^qlo vª^rqelofqfbp)ªfqªe^pªprccbobaªcoljªpbsboîªe^kaf`^mp) tefèªkbbaªqlª_bªâaobppba+ªTbª_bifbsbªqe^q)ªfcªqebpbªe^kaf`^mpª`^kª_bªp^qfpc^`ql * ofivªabîqªtfqe)ªqebªCPCª`lriaªmi^vª^ªhbvªolibªfkª^ªobsfpbaªdil_îªobdri^qlo vªbksf* olkjbkq+ª >ªcfopq mol_ibjªtfqeªqebªCPC)ª^pª`roobkqivªpqor`qroba)ªfpªqe^qªfqªalbpªklqªe^sbªclo* jîªobmobpbkq^qflkªcoljªhbvªbjbodfkdªjôhbqp+ªQefpªfpªmôqivª_b`^rpbªqebªlofdfkî D4ªt^kqbaªqlªobq^fkªqebfoª`lkqoliªlsboª^ªmol`bppªqebvª_bifbsbaª^ccb`qbaªmofjôfiv qebfoªltkªjôhbqp+ªFqªfpªîplªmôqivªarbªqlªqebªabpfobªqlªhbbmªqebªkrj_boªlcªmôqf` * fm^kqpªj^k^db^_ibªfkªloaboªqlªmoljlqbª`lkcfabkqfîªafp`rppflkpªtfqefkªqeb Clorj++ª%Bsbkªtfqeªqebª`roobkqª`lrkqo vªjbj_bopefm)ªjriqfmibªmôqf`fm^kqpªcolj `lrkqofbpª^kaªFCFpªjb^kpªqe^qªqebobªtbobªpljbª02ªmblmibªôlrkaªqebªq^_ib+& Fkfqfîiv)ªqebªCPCªqofbaªqlª_î^k`bªqebªkbbaªcloªbjbodfkdªjôhbqªfkmrqª^kaªpjîi* dolrmªafp`rppflkpªqeolrdeªobdflkîªjbbqfkdpªtfqeªhbvª^rqelofqfbpªfkª>pf^)ªI^qfk >jbof`^ª^kaªB^pqbokªBrolmb+ªQefpªeâªpljbªpr``bppª_rqªt^pªbsbkqrîivª^_^k * alkba)ªmôqivª_b`^rpbªlcªmobpprobªlkªhbvªmôqf`fm^kqpÖªqfjb+ªT bª_bifbsbªqebªqfjb e^pªkltª`ljbªqlªclojîivªbum^kaªqebªjbj_bopefmªlcªqebªCPCª_vªâafkdªmôqf`f * m^kqpªcoljªqebªj^fkªbjbodfkdªjôhbqp+ªFqªpbbjpªqe^qªqebªmlifqf`îªibâbopefmªlc qebªD/-)ªfkªfqpªabìô^qflkªcliiltfkdªqebªKlsbj_boª/--5ªprjjfq)ª^``bmqpªqefp ildf`+ªQebªafccf`riqªmlifqf`îªq^phªtfiiª_bªab`fafkdªbu^`qivªtefèª`lrkqofbpªpelria _bªfksfqbaªqlªglfk+ª >ªpb`lka fkpqfqrqflkîªpeloq`ljfkdªlcªqebª`roobkqªCPCªifbpªfkªqebªjriqfmibªobmob* pbkq^qflkªlcªqebªD4ª`lrkqofbpª%^kaªqlª^ªibppboªbuqbkq)ªlcªfkqbok^qflkîªlod^kfp^ * qflkp&+ªQebªD4ª`lrkqofbpªe^sbªqeobbªobmobpbkq^qfsbpªb^è)ªqlª^``ljjla^qbªqeb `ljmbqfkdªì^fjpªlcªcfk^k`bªjfkfpqofbp)ª`bkqoîª_^khpª^kaªobdri^qlovª^dbk`fbp+ªKlq lkivªalbpªqefpªâaªqlªqebªkrj_bopªôlrkaªqebªq^_ibª^kaªqerpªfkef_fqªafp`rppflk)ªfq afirqbpªobpmlkpf_fifqv+ªTbª_bifbsbªqebªj^gloªb`lkljfbpªpelriaªabpfdk^qbª^ªpfkdib qlm*ibsbiªmôqf`fm^kqªcoljªqebª^dbk`vªtfqeªlsboôèfkdªobpmlkpf_fifqvªcloªcfk^k`fî pq^_fifqvª^qªqebªk^qflkîªibsbi+ªQefpªfkafsfarîªpelriaªmobcbo^_ivª_bªqebªebâªlcªqeb ^dbk`vª^kaªpelriaª_b`ljbªqebªplibªobmobpbkq^qfsbªlcªqebª`lrkqovªfkªqebªCPC+ª>ªpfj* fiôªifjfq^qflkª`lriaª_bªfjmlpbaªlkªfkqbok^qflkîªlod^kfp^qflkp)ªprèª^pªqebªFJC ^kaªTloiaª?^kh+ªFcªqefpªtbobªalkb)ªfqªpelriaª_bªmlppf_ibªqlª_ofkdªfkqlªqebªCPCªîi hbvªbjbodfkdªjôhbqpªtfqelrqªbum^kafkdªfqpªpfwbª_bvlkaªte^qªfpª`lkpfpqbkqªtfqe co^khª^kaª`lkcfabkqfîªolrka*q^_ibªafp`rppflk+ >ªqefoa mol_ibjªcloª^kvªfkqbok^qflkîª_lavªfpªqebªqbkabk`vªlcªk^qflkîª^rqelo * fqfbpª^kaªqebªdbkboîªmr_if`ªqlªobpfpqªtôkfkdpªlcªsrikbo^_fifqvªarofkdªdllaªqfjbp+ QebªCPCªfpprbaªpbsboîªtôkfkdpªfkªqebªmboflaªibâfkdªrmªqlªqebª/--4ªlrq_ob^hªlc qro_ribk`b)ª_rqªqebpbªtbobªklqªebbaba+ª%>ªpfjfiôªbumbofbk`bª_bcbiiªtôkfkdp fpprbaª_vªqebªFJCª^kaª?FP+&ªFqªfpªqlªabîªtfqeªqefpªqbkabk`vªqe^qªtbªe^sbªâsl`^q * baª]eôa*tfofkd$ª`lrkqbo*`vìf`îªobdri^qlo vªdrfabifkbpªqe^qªtbª_bifbsbªjfdeqª_b eôaªqlªfjmibjbkqªqeolrdeªprmbo sfplovªafpòbqflk+ª Kl_lavª`^kªj^ka^qbªqe^qªqebªâsf`bªlcªqebªCfk^k`fîªPq^_fifqvªClorjªpelriaª_b ^``bmqbaª_vªdlsbokjbkqp+ª?rqªtbª_bifbsbªqbèkfnrbpªpelriaª_bªbumilobaªqlªrkabo* tofqbªqebªfkabmbkabk`bªlcªgradjbkqpª_vªqebªClorjª^kaªqlªbkprobªqe^qªfqpªgrad * jbkqpªôbªdfsbkªâbnr^qbªmr_if`fqv+ >ªclroqe mol_ibjªqe^qª`^kª_bª^jbiflo^qbaª_rqªklqª`ljmibqbivªplisbaªfpªqebªc^`q qe^qªqebªibdîª_^pfpªlcªobdri^qflkªfpªk^qflkî)ªtefibªcfk^k`fîªfkpqfqrqflkpª^kaªjô * hbqpªdil_îªfkªp`lmb+ªTbªalªklqª_bifbsbªqe^qªfkqbok^qflkîªibdîª^rqelofqv )ªeltbs* Geneva11_latest.qxp 07/05/2009 16:48 Page 61

The Structure of Regulation 61

boªabpfo^_ib)ªfpª^ªmo^`qf`îªmlifqf`îªmlppf_fifqvªfkªqebªclobpbb^_ibªcrqrob+ªKloªalªtb qefkhªfqªfpªabpfo^_ibªqlª`lkpqo^fkªqebª^`qfsfqfbpªlcªcfk^k`fîªfkpqfqrqflkpª^kaªjôhbqp tfqefkªk^qflkîª_lrkaôfbp+ªCloªqefpªob^plk)ªqebobªtfiiªfkbsfq^_ivª_bªd^mpª^kaªlsbo* i^mpªfkªobdri^qflk+ª>kvªmo^`qf`îª^mmol^èªqlªqefpªmol_ibjªjrpqªqebobclobªcl`rpªlk pqobkdqebkfkdªjbè^kfpjpªlcª`llmbo^qflkª^jlkdªfkabmbkabkqªk^qflkîª^rqelof * qfbp+ Bsbkªjlobªfjmloq^kqªqe^kªqebªfkqbokîªdlsbok^k`bªjbè^kfpjªlcªqebªCPCªfp te^qªfqªpelriaª^`qrîivªal+ªT bªpbbªhbvªcrk`qflkpªfkªqeobbªôb^p7ª%f&ªòfpfpªmobsbk * qflk)ªqeolrdeªbkprofkdªpqolkdbo)ªjlobª^mmolmof^qbª^kaªjlobª`lkpfpqbkqªmorabkqfî pq^kaôap8ª%ff&ªòfpfpªtôkfkd)ªqeolrdeªqebªjlkfqlofkdª^kaªefdeifdeqfkdªlcªpvp * qbjf`ªsrikbo^_fifqfbp)ª^kaª%fff&ªòfpfpªj^k^dbjbkq)ªfkª`^pbpªtebobªcfk^k`fîªqrojlfi _ob^hpªlrq+ Tfqeªobdôaªqlªòfpfp mobsbkqflk)ªqebobªfpªklªkbbaªqlªbifjfk^qbªqebª`roobkqªolibªlc fkqbok^qflkîªpq^kaôaªpbqqbopªfkªqebªôb^pªlcªqebfoªfkafsfarîªobpmlkpf_fifqfbp+ªFk lqeboªtloap)ªqebª?^pbiª@ljjfqqbb)ªmboe^mpªtfqeª^ªobsfpbaªjbj_bopefm)ªpelria `lkqfkrbªqlª_bªqebªibâªdolrmfkdªcloªclojri^qfkdªòlpp*_loaboª_^khfkdªpq^kaôap8 ^kaªpfjfiôivªtfqeªFLP@Lª^kaªqebªF>FPªcloªqebªpb`rofqfbpª^kaªfkpro^k`bªfkarpqofbp) ^kaªF>P?ªcloª^``lrkqfkdªpq^kaôap+ª?rqªqebªCPCªpelriaªe^sbªqebªobpmlkpf_fifqvªlc lmfkfkdªlkªqebª`lkpfpqbk`vªlcªmolmlpbaªprmbo sfplovªpq^kaôapªtfqeªlsboîiªpvp * qbjf`ªpq^_fifqv+ª Bipbtebobªfkªqefpªobmloq)ªtbªe^sbªmlfkqbaªlrqªbu^jmibpªlcªtebobª^ªcl`rpªlk fkpqfqrqflkîª%loªjfòlmorabkqfî&ªp^cbqvª^kaªplrkakbppªj^vªklqª_bªprccf`fbkqªql bkprobªpvpqbj*tfabª%loªj^òlmorabkqfî&ªpq^_fifqv +ªFkabbaªprèª^ªcl`rpªj^vªbsbk _bª`lrkqbomolar`qfsbªfkªqefpªobpmb`q+ªT bªpbbªlkbªq^phªlcª^ªobs^jmbaªCPCª^pª_bfkd qlªsbofcvªqe^qªoribpªmolmlpbaª_vªpq^kaôaªpbqqbopªôbª`lkpfpqbkqªtfqeªlsboîiªpvpqbj* tfabªpq^_fifqvªPr_gb`qfkdªqebªmolmlpîpªlcªprmbo sfplovªdolrmfkdpªqlª^ª]`lkpfpqbk`v èb`h$ª_vª^ª_lavªprèª^pªqebªCPCª`lriaªmolsfabª^ªrpbcriªjbè^kfpjªqlªj^hbªprob qe^qªobdri^qflkªalbpªklqª_b`ljbªfkâsboqbkqivªmol`vìf`î+ Tfqeªobdôaªql òfpfp tôkfkd)ªqebªolibªtbªbksfp^dbªcloªqebªCPCªfpªklqªdob^qivªafc * cbobkqªcoljªqebªlkbªfqªmi^vpª^qªqebªjljbkq+ª?rqªtbªalªpbbª^ªkbbaªcloªjlafcf`^ * qflkpªqlªfjmolsbªqebªè^k`bpªqe^qªtôkfkdpªalªklqªdlªrkebbaba+ªLkbªtlriaª_b qlªdfsbª`l*obpmlkpf_fifqvªcloªbôivªtôkfkdpªqlªqebªFJC)ªbke^k`fkdªqebª^rqelofqvªlc qebªobpriqfkdªgradjbkqp)ª^kaª_ofkdfkdªfkªqebªFJCÖpªj^òlb`lkljf`ªbumboqfpb+ªQ l p^cbdrôaª^d^fkpqªmlifqf`îªmobpprobªqlªmriiªmrkèbp)ªBôivªTôkfkdªObmloqpªpelria _bªmolar`baªrkaboªqebª^rqelofqvªlcªqebª@e^foj^kªlcªqebªCPCª^kaªqebªJ^k^dfkd Afob`qloªlcªqebªFJC )ªtfqelrqªbafqfkdª_vªjbj_boª`lrkqo vªobmobpbkq^qfsbp+ªT fqe obdôaªqlªqebªCPCÖpªob`ljjbka^qflkp)ª`lrkqofbpªtlriaª_bª^phbaªqlª]`ljmivªlo bumi^fk$ªqebfoªobpmlkpbp+ª @ofpfp obplirqflk mobpbkqpªmboe^mpªqebªdob^qbpqªèîibkdb+ª>pªîobâvªklqba)ªòfpfp obplirqflkªrprîivªfkslisbpªcfp`îªobplro `bpª^kaªqerpªfkslisbpªdlsbokjbkqpª^ka môif^jbkqp+ªFkªqebª`^pbªlcª^ªcfk^k`fîªòfpfpªprèª^pªqebªlkbªtbªôbªkltªbumbof * bk`fkd)ªfqªfpªeôaªqlªpbbªdlsbokjbkqpªabibd^qfkdªqefpª^rqelofqvªqlª^kªfkqbok^qflk * îªlod^kfp^qflk)ªloªrpfkdªaljbpqf`ª_radbqô vªobplro`bpªqlªebimªprmmloqªqebªòlpp* _loaboªlmbo^qflkpªlcªclobfdk*_^pbaªcfk^k`fîªfkpqfqrqflkp+ªTbªob`ldkfpb)ªqebobclob) qe^qªqebª_bpqªqe^qª`^kª_bªbumb`qbaªfpªqlªrpbª`llmbo^qfsbªjbè^kfpjp)ª^kaªbufpqfkd afp`rppflkªclo^ªqlªfjmolsbªfkcloj^qflkªbuè^kdbª^kaªqlªmoljlqbªkbdlqf^qflkpªlk lmqfjîªobplirqflkªpqo^qbdfbp+ Qebªpfdkfcf`^k`bªlcªqefpª^`qfsfqvªpelriaªklqª_bªjfkfjfpba)ªeltbsbo +ªTebob Geneva11_latest.qxp 07/05/2009 16:48 Page 62

62 The Fundamental Principles of Financial Regulation

qebobªôbªdil_îªo^jfcf`^qflkpªcoljª^ªmôqf`riôª`lropbªlcª^`qflk)ª`lrkqofbpªobmob * pbkqbaªfkªqebªCPCªpelriaª`ljjfqªqlª^slfaªjb^probpªeôjcriªqlªqebªfkqbobpqpªlc lqebop+ªTebkª^ª`lrkqo vªfpª`lkqbjmi^qfkdª^ªjb^probªqlªmolsfabªpvpqbjf`ªprmmloq qlªfqpªcfk^k`fîªpvpqbj)ª%cloªbu^jmib)ª^ªdrô^kqbbªlcª_^khªabmlpfqp&ªfqªpelriaª^``bmq ^kªl_ifd^qflkªqlªfkclojªmôqkboª`lrkqofbpªlcªfqpªfkqbkqflkpªfkªâs^k`bªlcªqebfo fjmibjbkq^qflk)ª^kaªqlªmolsfabªcloª^kªâbnr^qbªfkqbo sîªqlª`lkpfaboªqebªfkqbok^ * qflkîªfjmif`^qflkpªlcªprèª^`qflkp+ªKlkbªlcªqefp)ªlcª`lropb)ªtlriaªdrô^kqbbª^ `llmbo^qfsbªlrq`ljb+ª?rqªfqªtlriaª^qªib^pqªbkprobªqe^qªqebªjbè^kfpjpªbufpqbaªql mbojfqªprèª^ªobplirqflk)ªfcªqebªmlifqf`îªtfiiªt^pªqebob+ Geneva11_latest.qxp 07/05/2009 16:48 Page 63

8 Conclusions

Qebªabpfdkªlcªcfk^k`fîªobdri^qflkªfpªklqªpqo^fdeq*clo tôa+ªTebkªbsbovlkbªfpª_^v* fkdªcloªjlob)ªqlrdeboªobdri^qflk)ªfqªfpªklqªkbbaba)ª%_b`^rpbªbsbo vlkbªfpªofph ^sbopb&+ªTebkªprèªobdri^qflkªfpª_âivªkbbaba)ªklªlkbªt^kqpªfq)ª%pfk`bªqebªdlla qfjbpªôbªbumb`qbaªqlªoliiªlk&+ªªQefpªprddbpqpªqe^qªcfk^k`fîªobdri^qflkªpelriaª_b cl`rppba)ªmofjôfivªorib*_^pba)ª%_b`^rpbªafpòbqflkªtfiiª_bªeôaªqlªrpbªarofkdªmbof * lapªlcª_llj,brmelof^&)ª^kaªqfjbª^kaªpq^qb*sô vfkdª%ifdeqªarofkdªklojîªmboflap) fkòb^pfkdª^pªpvpqbjf`ªqeob^qpª_rfiaªrm&+ªQebªPm^kfpeªavk^jf`ªmob*molsfpflkfkd pèbjbªfpª^_lrqªqebªlkivª`roobkqªfkpqorjbkqªqe^qªjbbqpªqebpbªòfqbof^+ Lroª^kîvpfpªlcªqebªpq^qbªlcªcfk^k`fîªobdri^qflkªibâpªlkªqlªnrfqbª^ªibkdqevªifpq lcªhbvªmlfkqpª^kaªob`ljjbka^qflkpªtefèª`^kª_bªafsfabaªfkqlªclroªj^fkªebâ * fkdp)ªqlªtfqªDbkboî)ª@^mfqî)ªIfnrfafqvª^kaªLqebo +

8.1 General Conclusions and Recommendations (primarily from Chapters 1 and 2)

.+ Obdri^qflkª%buqbokîªfkqbo sbkqflk&ªpelriaªît^vpª_bª`^m^_ibªlcªgrpqfcf * `^qflkª^pª^ª`lkpbnrbk`bªlcªpljbªpmb`fcfbaªjôhbqªc^firob /+ Qebªj^fkª`^rpbªlcªbuqbokîfqfbpªôfpbpª_b`^rpbªqebªpl`fîª`lpqªlcªpvpqbjf` cfk^k`fîª`lii^mpbªbu`bbapªqebªmofs^qbª`lpqªqlªqebªfkafsfarîªcfk^k`fî fkpqfqrqflkpª%^kaªjôhbqp&+ª>ª`lii^mpbªlcª^ªcfk^k`fîªfkpqfqrqflkª`^rpbp ofphªpmfiilsbop+ªBccb`qfsbªobdri^qflkªpelriaªmolsfabªfk`bkqfsbpªcloªcfk^k * `fîªfkpqfqrqflkpªqlªfkqbokîfwbªqebpbªbuqbokîfqfbpª%ofphªpmfiilsbop&+ 0+ Qebªj^fkª`^rpbªlcªpvpqbjf`ª`lii^mpbªfpªbkaldbklrpªofph)ªqebªifhbifella lcªpbic*^jmifcvfkdªpmfoîpªifhbªqebªilppª^kaªjôdfkªpmfoî+ 1+ Pqobppªqbpqpªbu^jfkbªqebªobpmlkpbpªlcª_^khpªqlªbuldbklrpªofphp+ª?vª`lk * pqor`qflkªqebvªalªklqªfk`lomlo^qbªbkaldbklrpªofph+ª@ljmibqbivªkbt qbèkfnrbp)ªmboe^mpª_^pbaªlkªjlabipª^kaªbkaldbklrpªofph*pmfiilsbo jb^probp)ªifhbª@lSÔ)ªkbbaªqlª_bªabsfpbaªqlªbumilobªqebªfjmif`^qflkpªlc bkaldbklrpªofphªcloªqebªpvpqbj+ 2+ Obnrfobjbkqpª_^pbaªlkªjfkfjrjª`^mfqîªo^qflpªalªklqªmolsfab obpfifbk`b)ªpfk`bªqebvª`^kklqª_bª_ob^èba+ªQebvªobmobpbkqª^ª_roabkªql _^khp)ªklqª^ªplro`bªlcªpqobkdqe+ 3+ Obnrfobjbkqpªpelria)ªfkpqbâ)ª_bªklojîivªobpq^qbaªfkªqbojpªlcªefdebo qôdbqªibsbipªlcª`^mfqî)ªtfqeª^ªpmb`fcf`)ªpq^qrqlo vª%f+b+ªklqªafpòbqflkô v& ^kaªclo`bcriªiâaboªlcªfkòb^pfkdªp^k`qflkp+ªQefpªiâaboªpelriaªe^sbª^

63 Geneva11_latest.qxp 07/05/2009 16:48 Page 64

64 The Fundamental Principles of Financial Regulation

jfkfjrjªmlfkqª^qªtefèªbfqeboªqebªabcf`fbk`vªfpªp^qfpc^`qlofiv obaobppba)ªloªqebªfkpqfqrqflkªfpªperqªaltk)ªf+b+ªmoljmqª`loob`qfsbª^`qflk) m+`+^+ 4+ Qebªobpmlkpbªqlªqebª`roobkqªòfpfpªe^pªibaªfkªpbsboîª`lrkqofbpªqlª^ªcro * qeboª`lk`bkqo^qflkªlcªqebª_^khfkdªpvpqbjª^ka)ªmboe^mp)ªbipbtebob ^jlkdpqªebadbªcrkap+ªDob^qboªfkqbo sbkqflkªqlªbk`lro^dbª`ljmbqfqflk ^kaªqlªmobsbkqªlifdlmlifpqf`ª_be^sflroªj^vªtbiiª_bªtôo^kqba+

8.2 Capital Requirements (primarily from Chapters 3 and 4)

.+ ?^khp)ª^kaª^kvªlqeboªcfk^k`fîªfkpqfqrqflkªpr_gb`qªqlªabmlpfqªfkpro^k`b) pelriaª_bªpr_gb`qªqlªpljbª%ilt&ªjfkfjrjª`^mfqîªobnrfobjbkq+ªQefpªfp klqªqlª_bªpbbkª^pª^ªmolqb`qflkªcloªqebªobdri^qbaªfkpqfqrqflkª%o^qeboªqeb obsbopb8ªfqª`lkpqo^fkpªqebª_^khp&)ª_rqª^pª^ªmolqb`qflkªcloªqebªabmlpfq fkpro^k`bªcrka)ª^kaª^ªqofddboªcloªm+`+^+ /+ >iiªobdri^qlop,prmbosfplopªfkªb^èª`lrkqovªpelriaª^dobbªqebfoªltkªifpqªlc pvpqbjf`ªfkpqfqrqflkpª^kaªjôhbqp)ª^kaª_bªmobmôbaªqlªbuè^kdbªifpqp tfqeªprmbosfplopªfkªlqeboª`lrkqofbp+ª>iqelrdeªprèªifpqpªpelriaªklqª_b jâbªmr_if`)ª%l+^+ªjloîªe^wôaª^kaªqebªcrwwvªabcfkfqflkªlcªÖpvpqbjf`Ö&) qebobªpelriaª_bªjbè^kfpjpªcloªbkprofkdªqe^qªobdri^qlop,prmbo sfplop q^hbªqefpªbubo`fpbªjlpqªpboflrpiv+ª 0+ >iiªprèªpvpqbjf`ªfkpqfqrqflkpªpelriaª_bªpr_gb`qª_lqeªqlªjfòl*morabk * qfîªobdri^qflk)ªbu^jfkfkdªqebfoªfkafsfarîªofphªèô^`qbofpqf`pª%îlkd qebªifkbpªlcª?^pbiªFF&ª^kaªqlªj^òl*morabkqfîªobdri^qflk)ªobi^qbaªqlªqebfo `lkqof_rqflkªqlªpvpqbjf`ªofph+ªT bªprddbpqªqe^qªqefpªi^qqboª_bªalkbª_v âgrpqfkdªqebªjfòl*morabkqfîªo^qflª_vª^ª`l*bccf`fbkqªobi^qfkdªqlªqeb j^òl*morabkqfîª^ppbppbaªofph+ 1+ J^òl*morabkqfîªobdri^qflkªpelriaª_bª`lrkqbo `vìf`îª^kaªib^kªbpmb * `fîivª^d^fkpqª_r__ibpªtelpbª_ropqfkdª`^kªfjm^foªqebªcfk^k`fîªfkqbojb* af^qflkªpb`qlo+ª 2+ Tbªôdrbªqe^qªqebª_bpqªjb^probpªlcª^kªfkpqfqrqflkÖpª`lkqof_rqflkªql j^òl*morabkqfîªofphªôbªfqpªibsbo^db)ªj^qrofqvªjfpj^qèª^kaªo^qbªlc bum^kpflk+ªJlobªmob`fpbªbkaldbklrpªofph*pmfiilsboªjb^probpªqe^qªîpl q^hbªifnrfafqvª^pmb`qpªfkqlª^``lrkqªpelriaª_bªabsbilmba+ªPlªtbªtlria fkqbo^`qªb^è)ªpvpqbjf`)ªfkpqfqrqflkÖpªqfboª.ª?^pbiªFFªo^qflª_vªjriqfmif`^ka) tefèª`lriaª_bª_bilt )ª^pªtbiiª^pª^_lsb)ªrkfqv )ª_^pbaªlkª^ªjfuqrobªlc ibsbo^db)ªj^qrofqvªjfpj^qèª^kaªdoltqe+ 3+ Fkpqfqrqflkpªtefèªôbªklqªfkafsfarîivªpvpqbjf`)ª_rqªtefèªôbª%f&ªefde* ivªibsbo^dbaªtfqeªpeloq*qbojªab_qª^kaª%ff&ªeliaª^ppbqpªtfqeªiltªjôhbq ifnrfafqvª%^qªqfjbpªlcª^ªòfpfp&)ª`^kªkbsboqebibppªe^sbªpvpqbjf`ªbccb`qpªsf^ glfkqªeboa*qvmbª_be^sflro+ªPlªqebvªpelriaªîi)ªbu`bmqªcloªqebªqfkfbp)ª_lqe obmloq)ª^kaªe^sbªpljbª`lkpqo^fkqpª%fkªqebªclojª^d^fkªlcª^ªiâaboªlcªp^k`* qflkp&)ªlkªqebfoªj^òl*morabkqfîªofphfkbpp)ªf+b+ªqebfoªibsbo^db)ªj^qrofqv jfpj^qèª^kaªòbafqªbum^kpflk)ª%tefèª`lriaªmboe^mpªsô vª_bqtbbk hfkapªlcªfkpqfqrqflkp)ªb+d+ª_^khpª^kaªebadbªcrkap&+ Fqªtlriaª_bªcloªafp`rppflk)ª%^kaªlroªdolrmª`lriaªklqª^dobb&)ªtebqebo prèªefdeiv*ibsbo^dba)ª_rqªfkafsfarîivªklk*pvpqbjf`)ªfkpqfqrqflkp pelriaªîplªe^sbª^kv âafqflkîªjfòl*morabkqfîªobdri^qflk+ 4+ >ppbq*mof`bª^kaªòbafqª`vìbpªafccboªcoljª`lrkqo vªqlª`lrkqo v)ª^kaªcolj Geneva11_latest.qxp 07/05/2009 16:48 Page 65

Conclusions 65

obdflkªqlªobdflk+ª>iqelrdeªqebªmofk`fmibpªlcª`lrkqbo*`vìf`îªobdri^qflk pelriaª_bªrkfsbopî)ªfqpª^mmif`^qflkªtlriaªibâªqlªafccbofkdªo^qflpªfk b^èªôb^ª^mmivfkdªqebªobdri^qflkp)ªklojîivªfkªqebªelpqª`lrkqo v+ 5+ B^èªelpqª`lrkqo vª%obdflk&ªpelriaªe^sbªqebªofdeqªqlªabpfdk^qbª^ªòlpp* _loaboªpr_pfafôv)ªloª_o^kè)ª^pªÖpvpqbjf`Ö+ªPvpqbjf`ª_o^kèbpªpelriaª_b obnrfobaªqlª_b`ljbªpr_pfafôfbp+ªClobfdk*ltkbaªpr_pfafôfbpªpelriaª_b pr_gb`qªqlªqebªp^jbª`^mfqîªobnrfobjbkqª`î`ri^qflkp)ª^kaªeliaªqe^qªfk aljbpqf`ª^ppbqp)ª^pªfqpªltkªaljbpqf`ª_^khp+ 6+ >kªîqbok^qfsbª^mmol^è)ªtefèªjfdeqª_bªibppªoâf`î)ªtlriaª_bªqlªdbk * boîfpbª^kaªqlªbuqbkaªqebªmobpbkqªPm^kfpeªavk^jf`ªmob*molsfpflkfkd pèbjbªqlªîiª`lrkqofbp)ªqelrdeªqefpªîplªtlriaªkbbaªqlª_bª^mmifbaªlk ^ª`lrkqov*_v*`lrkqovª_^pfp+ªFcªqefpªtbobªqlª_bªalkb)ªFCOPªtlriaªe^sbªql _bªobsfpbaªqlªmbojfqªqefp+ .-+ Qebª^mmif`^qflkªlcªj^òl*morabkqfîªjb^probpªpelriaª_b _vªqebª@bkqoîª?^kh8ªcloªqefpªmromlpbªqebvªpelriaª_bª^_ibªqlªrkaboq^hb %lk*pfqb&ªprmbo sfpflkªlcªfkafsfarîªpvpqbjf`ªfkpqfqrqflkp)ªpbmô^qbiv coljªqebªjfòl*morabkqfîªprmbosfplo%p&+ªBccloqpªpelriaª_bªjâbªqlªifjfq qebªâjfkfpqo^qfsbª_roabkªlcªjriqfmibªprmbo sfplop)ª^kaªobmloqfkd obnrfobjbkqpª^kaªabcfkfqflkpªpelriaª_bªeôjlkfpba+

8.3 Liquidity (primarily from Chapter 5)

.+ Tbªmolmlpbª^ªÖjôhªqlªcrkafkdÖª^mmol^èªqlªmolsfabªfk`bkqfsbpªcloªjlob ilkd*qbojªcrkafkd+ªQefpª^mmol^èªfp)ªfkªbccb`q)ªìlpbivª^hfkªqlªqebªj^qr* ofqvªjfp*j^qèªiâaboªmobsflrpivª`lkpfabobaª_vªqebª?^pbiª@ljjfqqbbªlk ?^khfkdªPrmbosfpflkª%?@?P&ª^kaª_vªpljbª@bkqoîª?^khp+ /+ Rkifhbªjlpqªprèªmofloªbubo `fpbpªtbªtlriaªîplªmolsfabªfk`bkqfsbpªql eliaªifnrfafqvª_v)ªlk`bª^d^fk)ªfkqbo^`qfkdªqebª^ppbppbaªifnrfafqvªtfqeªqeb `^mfqîªâbnr^`vªo^qfl+ªIfnrfafqvªfpªjb^probaª_vª^kªbccb`qfsbªj^qrofqv jfpj^qèªtefèªq^hbpªqebªjôhbqªifnrfafqvªlcª^ppbqpª%^qªqfjbpªlcªòfpfp& fkqlª^``lrkq+ªQebªjlobªifnrfafqvªcbiiª_biltªqebªtbii*qôdbqbaªibsbi)ªqeb efdeboªqebª@>Oªtlriaªe^sbªqlª_b)ª^kaªsf`bªsbop^+ªQebªobi^qflkpefm %qoâb*lcc&ªkbbaªklq)ªeltbsbo)ª_bªifkbô+ 0+ Tbªalr_qªtebqeboªâafqflkîªmofs^qbªfkpro^k`bª`^kªqebkªebimªjrèªlk l``^pflkpªtebkªjôhbqª^kaªcrkafkdªifnrfafqvªs^kfpebp8ªqebªbu^jmibpªlc qebªjlkl*ifkbpª^kaªlcª>FDª`lkcfojªlroªalr_qp+ªQebª^kptboªtlriaªpbbj qlª_bªpljbª`lj_fk^qflkªlcªmr_if`ªpb`qloªjôhbq*j^hfkd)ª%^pªkltª_vªqeb Cbaªfkªqebª@Mªjôhbq&)ª^kaªmr_if`ªpb`qloªfkpro^k`b)ª%drô^kqbbpªlcªlkb hfkaªloª^klqebo&+ 1+ Tbªprddbpqªqe^qªjôh*ql*crkafkdªjfdeqª_bª^ªmofk`fmibªqe^qª`lriaª^mmiv qlªqebªmloqcliflpªlcªcfk^k`fîªfkpqfqrqflkpªcloª^``lrkqfkdªmromlpbp) bfqeboª^pª^kªîqbok^qfsb)ªloª^ªprmmibjbkq)ªqlªqebªmobpbkqª`^qbdlofbp)ªf+b+ eliaªqlªj^qrofqv)ª^s^fi^_ibªcloªpîb)ªqoâfkdª_llh+ 2+ Qlªlsbo`ljbªab_qªlsboe^kdªmol_ibjp)ªqebªobdri^qloªpelriaªe^sbªqeb ^rqelofqvªqlª`lksboqªprèªsbopflkpªlcªbufpqfkdªab_q)ª^pªîobâvª`lrkqpª^p qfboª.ªloªqfboª/ª`^mfqî)ªfkqlªbnrfqv + Geneva11_latest.qxp 07/05/2009 16:48 Page 66

66 The Fundamental Principles of Financial Regulation

8.4 Other Considerations (primarily from Chapters 6 and 7)

.+ Tbªmolmlpbªqe^qªprmbo sfplopªpelriaªclojri^qbª^ªpbqªlcªobjrkbo^qflk drfabifkbp)ª^ka)ª%^pªfkªlqeboªbu^jmibpª_bilt&)ªâgrpqª`^mfqîªo^qflp ^``loafkdªqlªqebªabdobbªlcª`ljmif^k`b+ª /+ Tbªâsl`^qbªqebª@bkqoîª?^khªpbqqfkdªjûfjrjªIl^k*ql*S îrbª%IQS& o^qflpªcloªobpfabkqfîªjloqd^dbpª^pª^kªâafqflkîªj^òl*morabkqfîªjb^p* rob+ªQefpªtlriaªfkslisb)ª^pª^ª`loliiôv)ªlrqi^tfkdªpbsboîªl_sflrpª^slfa* ^k`bªjb^probp)ªb+d+ªpb`lkaªjloqd^dbp+ 0+ Tbªôdrb)ª^qªpbsboîªmlfkqp)ªqe^qªòbafqªo^qfkdpªôbªpvpqbj^qf`îivªjfp * rpbaªfkªqebªobdri^qlo vªmol`bpp+ªTebob^pªtbªôbªe^mmvªqlªpbbªcroqebo qfdeqbkfkdªlcªÖ`lkcif`q*lc*fkqbobpqÖª^kaªqo^kpmôbk`vªobdri^qflkp)ªtb tlriaªlqebo tfpbªpbbhªqlªbuìrabª@OLpªcoljªqebªobdri^qlo vªkbqtloh îqldbqebo+ªTbªobdôaª_lqeªqebª?^pbiªFFª^mmol^èªqlªqebªrpbªlcªòbafqªo^q* fkdpª^kaªqebªBrolmb^kªmolmlpîpªcloªqebfoªbke^k`baªobdri^qflkª^pªjfp * `lk`bfsba+ 1+ Tbªprmmloqªqebªbccloqpªlcªqebª@OJMDªqlªjlsbªpvpqbjf`îivªfjmloq^kq abofs^qfsbªjôhbqpªlkqlª`bkqoîfpbaªìbôfkdªelrpbp+ 2+ B^èª"fkafsfarîivªpvpqbjf`"ªcfk^k`fîªfkpqfqrqflkªpelriaª_bªobnrfobaªql molsfabª^kkrîivª^ªcriiª`lkqfkdbk`vªmi^kªcloªabîfkdªtfqeªfqpªltkª_^kh* ormq`v+ 3+ Tbª`^kklqªrkabopq^kaªelt )ª^kaªtev )ªqebªbka*vbôªpmfhbªfkªcfk^k`fî jôhbqpªe^pª_bbkªîiltbaªqlªobj^fk+ªFqªfpª_lqeª^_proaª^kaªa^j^dfkd+ Tbªprddbpqªqtlªîqbok^qfsbªjbqelapªlcªboâf`^qfkdªfq+ 4+ ?b`^rpbª`vìbpª%fkª^ppbqªmof`bpª^kaªòbafq&ªsôvªcoljª`lrkqovªqlª`lrkqov) ^pªtbiiª^pªcoljªqfjbªqlªqfjb)ªtbªmolmlpbª^ªpefcqªlcªbjme^pfpªfkªobdri^ * qlovªmltbopªqltôapªqebªelpqª`lrkqo v+ 5+ ?b`^rpbªòfpfpªj^k^dbjbkqªfpªlcqbkªbuqobjbivªbumbkpfsb)ªfqªe^pªqlª_b alkbª_vªqebª%elpq&ª@bkqoîª?^khªfkª`lkgrk`qflkªtfqeªfqpªltkªJfkfpqo v lcªCfk^k`b+ª>pªpllkª^p)ª_rqªklqª_bclob)ªqebªBrolwlkbªl_q^fkpªcfp`îªmlt* bopªqlªj^k^dbª^kvªprèªòfpbp)ª qebk j^òl*morabkqfîªj^k^dbjbkqª`^k _bªpefcqbaªcoljªqebªK^qflkîª@bkqoîª?^khpªqlªpljbªcbaboîªbrol*wlkb _lav+ 6+ Tebob^pªòfpfpªj^k^dbjbkqªe^pªqlª_bªalkbª^qª^ª%k^qflkî&ªibsbiª`lkpl * k^kqªtfqeªqebª^s^fi^_fifqvªlcªcfp`îª%qûm^vbo&ªcrkafkd)ªòfpfpªmobsbkqflk `^k)ª^kaªpelria)ª_bªalkbªfkqbok^qflkîiv+ªTbªj^hbªpbsboîªmolmlpîpªql obclojª_lqeªqebªpqor`qrobª^kaªobjfqªlcªqebªCfk^k`fîªPq^_fifqvªClorj+ Tbªe^sbªmrqªclotôaªkbôivª0-ªhbvªmlfkqpª^kaªob`ljjbka^qflkp+ªFcªâlmqba)ªqebv tlriaªè^kdbªqebªmobpbkqªpvpqbjªoâf`îivª^kaªcloªqebª_bqqbo + Geneva11_latest.qxp 07/05/2009 16:48 Page 67

Appendix : The Boundary Problem in Financial Regulation

Qebobªôbª^ªkrj_boªlcªcrka^jbkqî)ªdbkbof`ªfpprbpªobi^qfkd)ª^qªîiªqfjbpª^kaªbsbov* tebobª%îjlpq&ªqlªcfk^k`fîªobdri^qflk+ªFkªmôqf`riôªfcªobdri^qflkªfpªbccb`qfsb)ªfqªtfii `lkpqo^fkªqebªobdri^qbaªcoljª^èfbsfkdªqebfoªmobcbooba)ªrkobpqof`qba)ªmlpfqflk) lcqbk23 _vªiltbofkdªqebfoªmolcfq^_fifqvª^kaªqebfoªobqrokªlkª`^mfqî+ªPlªqebªobqrokp ^èfbs^_ibªtfqefkªqebªobdri^qbaªpb`qloªôbªifhbivªqlªcîiªobi^qfsbªqlªqelpbª^s^fi^_ib lkªpr_pqfqrqbpªlrqpfab+ªQebobªtfiiª_bª^ªptfqèªlcª_rpfkbppªcoljªqebªobdri^qbaªqlªqeb klk*obdri^qbaªpb`qlo+ªFkªloaboªqlªmolqb`qªqebfoªltkª_rpfkbppbp)ªqelpbªfkªqebªobdr * i^qbaªpb`qloªtfiiªpbbhªqlªlmbkªrmª`lkkb`qbaªlmbo^qflkpªfkªqebªklk*obdri^qbaªpb` * qlo)ªfkªloaboªqlª`^qèªqebª_bqqboªlmmloqrkfqfbpªqebob+ªQebªbu^jmibªlcª`ljjbo `fî _^khpªpbqqfkdªrmª^ppl`f^qbaª`lkarfqp)ªPFSpª^kaªebadbªcrkapªfkªqebªi^pqªòbafqª_r_ * _ibªfpª^ª`^pbªfkªmlfkq+ ?rqªqefpª`lkafqflkªfpªnrfqbªdbkboî+ªLkbªlcªqebªjlobª`ljjlkªmolmlpîp)ª^qªib^pq fkªqebªm^pq) 24 cloªabîfkdªtfqeªqebªsôflrpªmol_ibjpªlcªcfk^k`fîªobdri^qflkªe^p _bbkªqlªqovªqlªifjfqªabmlpfqªfkpro^k`bª^kaªqebªp^cbqvªkbqªqlª^ªpbqªlcªÖkôoltª_^khpÖ) tefèªtlriaª_bª`lkpqo^fkbaªqlªeliaªlkivªifnrfaª^kaªÖp^cbÖª^ppbqp+ªQebªfab^ªfpªqe^q qefpªtlriaªmolsfabªp^cbªabmlpfqpªcloªqebªlome^kpª^kaªtfaltp+ªJloblsbo)ªqebpbªkô* oltª_^khpªtlriaªorkª^ªìbôfkd*elrpbª^kaªhbbmªqebªm^vjbkqpÖªpvpqbjªfkªlmbo^ * qflk)ªte^qbsboªe^mmbkbaªbipbtebob+ªCloªîiªlqeboªcfk^k`fîªfkpqfqrqflkpªlrqpfabªqeb kôoltª_^khfkdªpvpqbj)ªfqªtlriaª_bª^ª`^pbªlcªÖ`^sb^qªbjmqloÖ+ªQebvªpelriaª_b îiltbaªqlªc^fi)ªtfqelrqªlccf`fîªprmmloqªloªqûm^vboªob`^mfqîfp^qflk+ Fkªc^`q)ªfkªqebªRHªpljbqefkdª^hfkªqlª^ªkôoltª_^khfkdªpvpqbjªt^pªmrqªfkªmi^`b fkªqebª.6qeª`bkqro vªtfqeªqebªMlpqªLccf`bªP^sfkdpª?^khª^kaªqebªQ orpqbbªP^sfkdp ?^kh+ª?rqªqebªfab^ªqe^qªqebªlccf`fîªp^cbqvªkbqªpelriaªe^sbª_bbkªobpqof`qbaªqlªMLP? ^kaªQP?ªt^pªkbsboªpboflrpivªbkqboq^fkba+ªKloª`lriaªfqªe^sbª_bbk+ªTebkª^ªÖkôolt _^khÖªfpª`lkpqo^fkbaªqlªeliafkdªifnrfa)ªp^cbª^ppbqp)ªfqªfpªpfjriq^kblrpivªmobsbkqba coljªbôkfkdªefdeboªobqrokp)ª^kaªqerpªcoljªlccbofkdª^pªefdeªfkqbobpqªo^qbp)ªloªlqebo sîr^_ibªpbosf`bp)ª%prèª^pªlsboao^cqp&)ªqlªfqpªabmlpfqlop+ªKloª`lriaªqebª^rqelofqfbp fkªdllaª`lkp`fbk`bªmobsbkqªqebª_olâboª_^khpªcoljªpbqqfkdªrmªqebfoªltkªìbôfkd elrpb+ªQerpªqebª_^khfkdªpvpqbjªlrqpfabªqebªkôoltª_^khpªtlriaªdoltªjrè c^pqboªrkaboªklojîª`fo`rjpq^k`bp8ªfqªtlriaªmolsfabªjlpqªlcªqebªòbafqªqlªqebªmof * s^qbªpb`qlo)ª^kaªmôqf`fm^qbªfkªqebªhbvªìbôfkdª^kaªpbqqibjbkqªmol`bppbpªfkªqeb b`lkljv+25 Qefpªjfdeqª_bªmobsbkqbaª_vªi^t )ªq^hfkdªibdîªpqbmpªqlªmolef_fqª_olâboª_^khp coljªmolsfafkdªjb^kpªlcªm^vjbkqªloªbpq^_ifpefkdªìbôfkdª^kaªpbqqibjbkqªpvpqbjp lcªqebfoªltk+ªQebobªôb)ª^qªib^pq)ªclroªmol_ibjpªtfqeªprèª^ªjlsb+ªCfopq)ªfqªorkp ^clriªlcªmlifqf`îªb`lkljvª`lkpfabo^qflkp+ª>pªpllkª^pª^ªpfdkfcf`^kqª_lavªlcªslqbop

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68 The Fundamental Principles of Financial Regulation

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Appendix: The Boundary Problem in Financial Regulation 69

mobpprobpªlcªeboaªjbkqîfqv )ª`ljmbqfqflkªcloªjôhbqªpeôb)ªbq`+)ªj^hbªfqªgrpqªqll afccf`riqªcloªjlpqªj^k^dbopªqlªpfqªlrqªqebªa^k`b+ Prmmlpbªqe^qªprèª`lrkqbo*`vìf`îªâgrpqjbkqª`^kª_bªalkbªpr``bppcriiv +3- @^mfqîªobnrfobjbkqpªôbªo^qèbqbaªrmªbklrdeªfkªdllaªqfjbpªqlªmobsbkqªqebªobdr * i^qbaªbum^kafkdª^pªjrèª^pªqebvªlqebo tfpbªtlria+ªQebªobpriq)ª^pªtfqeªkôolt _^khp)ªtlriaª_bªqlªibppbkªqebªmolcfq^_fifqvª^kaªobqrokpªlkªqebªobdri^qba)ªobi^qfsbiv qlªqebªrkobdri^qbaª^qªprèªqfjbp+ªQebobªfpªprobªqlª_b)ªloªqlªabsbilm)ª^ª_lrkaô v mol_ibj+ªArofkdªdllaªqfjbpªcrkapªtfiiªciltªcoljªqebªobdri^qbaªqlªqebªrkobdri^q * ba)ª^kaªqebªobdri^qbaªtfiiªpbbhªqlªcfkaªt^vpªlcªqo^kpcboofkdª_rpfkbppªqlªrkobdri^q * baª^ppl`f^qbp+ªArofkdªòfpbpªqebªciltªtfiiªobsbopb)ªifhbivªtfqeªpboflrpªâsbopbª`lk * pbnrbk`bp+ªLroªltkªmolmlpîpªôbªgrpqª^pªpr_gb`qªqlªqefpªdbkbof`ª_lrkaôvªmol_ibj ^pª^kvªlqebo+ªFcªcfk^k`fîªobdri^qflkªfpªbccb`qfsb)ªfqªtfiiªe^sbªqlªc^`bªqebª_lrkaô v mol_ibj+ Pfk`bªqebªmol_ibjªfpª`^rpbaª_vª_lrkaôfbpª_bqtbbkªqebªjlobª^kaªqebªibppªobd * ri^qba)ªlkbªbuqobjbªplirqflkªjfdeqª_bªqlªobdri^qbªbfqeboªklªcfk^k`fîªfkpqfqrqflk) loªîiªlcªqebjªîfhb+ª?lqeªmolmlpîpªe^sbªpljbªâebobkqp)ªtfqeªpljbªâsl`^qfkd Öcobbª_^khfkdÖª)ª`lkpqo^fkbaª_vªjôhbqªafp`fmifkbªîlkb)ª^kaªlqebopª^ª`ljmibqbiv `lkqoliibaªcfk^k`fîªpvpqbj)ª^pªcloªbu^jmibªmo^`qf`baªfkªjlpqª`lrkqofbpªrkqfiªqeb .63-p+ªKbfqeboªbuqobjbªtlriaªpbbjªcb^pf_ib8ªÖcobbª_^khfkdÖ 3. tlria)ªtbª_bifbsb) ibâªqlªobpriqpªqe^qªtlriaª_bªmlifqf`îivª^kaªpl`fîivªrk^``bmq^_ib)ªtebob^pªqlqîiv `lkqoliibaªcfk^k`fîªfkqbojbaf^qflkªfpªfk`lkpfpqbkqªtfqeª^ªcobbªjôhbqª`^mfqîfpq b`lkljv)ªbpmb`fîivªplªfcªbuè^kdbª`lkqolipªlkª`^mfqîªciltpªtlriaª_bªkbbabaªql mobsbkqªafpfkqbojbaf^qflkª^_olâ+ªPlªfcªqebªbuqobjbpªôbªbifjfk^qba)ªcfk^k`fîªobd* ri^qlopª^kaªprmbosfplopªtfiiªît^vpªlmbo^qbªfkª^kªfkqbofloªpm^`b)ªfkªtefèªqebobªfp `boq^fkªqlª_bª^ªÖ_lrkaô vªmol_ibjÖ+ Qebªrkobdri^qba)ªeltbsbo)ªlcqbkªabmbkaªlkªpbosf`bp)ªb+d+ªm^vjbkqª^kaªâjfk* fpqo^qfsb)ª^kaªlkª_^`h*rmªifkbpªlcªòbafqªcoljªqebªobdri^qba+ªFkabba)ªqebªrkobdr * i^qbaªôbªcobnrbkqivª^ppl`f^qbp)ªloªlcc*pellqp)ªqlªqebªobdri^qba+ªPlª`^kklqªlkbªj^fk* q^fkªqebª_lrkaô vªtfqelrqªbu`bppfsbªafccf`riqvª_vªpljbª`lj_fk^qflkªlcªmolef_f * qflkªlkªqebªobdri^qbaªj^fkq^fkfkdª^ppl`f^qbaªrkobdri^qbaªbkqfqfbp)ª^kaªlcªifjfq^ * qflkpªlkªqebªobdri^qbaÖpª^_fifqvªqlªmolsfabªòbafqª%bsbkªlkª^ª`lkqfkdbkqª_^pfp&)ª%^ka pbosf`bp<&ªqlªqebªrkobdri^qba<ªTbªe^sbªîobâvªklqbaªpljbªlcªqebªj^fkªôdrjbkqp ^d^fkpqªibdîªmolef_fqflk+ªJloblsbo )ªeltª`lriaªlkbªmobsbkqª^ªclobfdkª_^khªmol * sfafkdªprèªpbosf`bp<ªBsbkªfcªlkbª`lria)ª^kaªt^kqbaªql)ªao^tª^ªpqof`qªafsfafkdªifkb _bqtbbk)ªp^v)ªobdri^qbaª_^khpª^kaªrkobdri^qbaªebadbªcrkap)ªtlriaªfqªklqª_bªmlp * pf_ibªcloªebadbªcrkapªglfkqivªqlªbpq^_ifpeª^ªpbmô^qbª`bkqoîªfkpqfqrqflkªqlªmolsfab qebjªtfqeªnr^pf*_^khfkdªpbosf`bp)ªfkìrafkdªqebªmolsfpflkªlcªòbafq<ªFcªqebªrkobd * ri^qbaª_b`ljb)ª^pª^ªobpriqªlcªobdri^qflk)ªjlobªmolcfq^_ibªqe^kªqebªobdri^qba)ªlsbo ^ªilkdªbklrdeªorkªlcªvbôpªcloªqefpªqlª_b`ljbªmr_ifìvª^mmôbkq)ªqebªrkobdri^qba tfii)ªlkbªt^vªloª^klqebo)ªît^vpª_bª^_ibªqlª^qqo^`qªbklrdeªcrkafkdªcloªbuqo^ªbum^k* pflk)ªeltbsboªpbsbobivªqebªafsfafkdªifkbª_bqtbbkªqebªobdri^qbaª^kaªqebªrkobdr * i^qbaªj^vª_bªao^tk+ Ob`ldkfqflkªqe^qªprèª^ªmol_ibjªfpªdbkbof`ªj^vªebimªqlªjfqfd^qbªfq+ªJ^kvªobd * ri^qlop,prmbosfplopª^mmbôbaªqlªe^sbª_bbkªq^hbkªiôdbivªrk^tôbpª_vª_^khpÖ obif^k`bªlkª^ppl`f^qbaªPFSp)ªbq`+)ªfkª/--4+ªQebvªpelriaªklqªe^sbª_bbk+ª>kvªkbt obdri^qflk)ªprèª^pª?^pbiªF)ª?^pbiªFF)ªloªqfjb*sô vfkdª@>Opªprèª^pªebob)ªtfiiª_ofkd tfqeªfqªkbtª_lrkaô vªmol_ibjp+ª>kvªprmbo sfploªjrpqªqo vªqlªibôkªeltªqebªobdr * i^qbaªôbªpbbhfkdªqlª^slfaªqebª`lkpqo^fkqpªmi^`baªrmlkªqebj)ª%^kaªfcªqebªobdri^qba Geneva11_latest.qxp 07/05/2009 16:48 Page 70

70 The Fundamental Principles of Financial Regulation

ôbªklqªalfkdªpl)ªfqªj^vª_bª^kªfkaf`^qflkªqe^qªqebªobdri^qflkªfpªgrpqªfkbccb`qfsb!&+ >iqelrdeª_lrkaôvªmol_ibjpªôbª^ªdbkbof`ª`lkpbnrbk`bªlcªbccb`qfsbªcfk^k`fî obdri^qflk)ªfqªalbpªklqªjb^kªqe^qªîiªprèªobdri^qflkªfpª^ªt^pqbªlcªqfjb)ªkloªqe^q prèªmol_ibjpª`^kklqª_bªjfqfd^qbaª_vªpbkpf_ibªabpfdk+ªTbªqrokªkbuqªqlªpljbªmol* mlpîpªcloªpbqqfkdªqebª_lrkaôvªfkª^ªj^kkboªqe^qª`^kªebimªqlªibppbkªprèªmol_ibjp+ Plªte^qªpelriaªobdri^qlop,prmbo sfplopªalªfkªqefpªobpmb`q<ªQebvªpelriaªpqôqª_v qovfkdªqlªifpqªqebªhbvªcfk^k`fîªjôhbqpª^kaªpvpqbjpªfkªqebfoªltkª`lrkqo v+ªE^sfkd alkbªpl)ªqebvªpelriaªobsfbtªtebqeboª^kaªtefèªcfk^k`fîªfkpqfqrqflkpªôbªpl fjmloq^kqªqlªqebªcrk`qflkfkdªlcªqe^qªjôhbq)ªloªpvpqbj)ªqe^qªqebfoªaltkcîi) tebqeboªfkªqebªclojªlcª_^khormq`vªloªj^gloªabibsbo^dfkd)ªtlriaªpboflrpivªafpormq qebªlmbo^qflkpªlcªqe^qªjôhbqªloªpvpqbj+ªE^sfkdªalkbªpl)ªqebvª`lriaªdfsbªqeb cfk^k`fîªfkpqfqrqflkpªfkslisbaª^ªèlf`b)ªbfqeboªqlªobar`bªqebfoªbumlprobªqlªqefp jôhbqª%loªpvpqbj&)ªloªqlª_bªobdri^qba+ªCloªbu^jmib)ª^kvªebadbªcrkaªtfqeª^ªqlqî pfwbª_bvlkaªpljbªifjfq)ªloªfkslisbjbkqªfkª^kvªjôhbqª_bvlkaªpljbªp`îb)ªtlria _bªjlobªìlpbivªprmbo sfpba8ªlqebo tfpbªjlobªifdeqiv )ªloªmlppf_ivªklqª^qªîi+ªJlpq tlriaª^slfaª^kvªprèªprmbo sfpflk+ª?rqªqe^qªtlriaª_bªîiªqlªqebªdlla+ªQebª^fj tlriaª_bªqlªhbbmªcrkapªpjîiª^kaªafsbopfcfbaªbklrdeªplªqe^qªqebvª`^kª_bªîiltba qlªc^fi+3/ Qefp)ªeltbsbo)ªfdklobpªqebªmol_ibjªlcªeboaª_be^sflroª^jlkdªpjîi)ª^ka jbafrj)ªpfwbaªcfk^k`fîªfkpqfqrqflkp+ª>ªt^vªlcªabîfkdªtfqeªqefpªt^pªafp`rppbaªfk Pb`qflkª0+ Fkªbppbk`bªqebªcfk^k`fîªprmbosfplopªe^sbªdlqªqlª^phªqebjpbisbp)ªtefèªcfk^k`fî fkpqfqrqflkpª`^kª_bªîiltbaªqlªc^fi)ª^kaªtefèª`^kklq+ªQelpbªqe^qªqebvªì^fjª`^k * klqª_bªîiltbaªqlªc^fi)ªpelriaª_bªpmb`fcf`îivªobdri^qba+ªQebªòfqbof^ªcloªobdri^qflk pelriaª_bªjâbªmr_if`+ª>kvªfkpqfqrqflkªtefèªfpªobdri^qbaª^pªqllªfjmloq^kqªqlªc^fi) pelriaª_bªîiltbaªqlª^mmbîª^d^fkpqªqe^qªorifkd)ª^kaªpelriaªîplªe^sbªqebªlmqflk qlª^slfaªobdri^qflkª_vªaltkpfwfkd+ª?bpfabpªl``^pflkpªlcªfkpqfqrqflkîªaltkcîi) obdri^qlopªkbbaªqlª_bª`lk`bokbaªtfqeªprèªjôhbqªc^firobpª^pªj^vªibâªqlªobplro`b jfpîil`^qflkp)ªb+d+ªfkªqebªdrfpbªlcª^ppbqª_r__ibpª^kaª_rpqp+ Te^qªafccbobk`bªtlriaªqefpª^mmol^èªj^hb<ªMol_^_ivªklqªjrè+ªQebªcbt obj^fkfkdªiôdbªRPªfksbpqjbkqªelrpbpªe^sbªîobâvª`ljbªrkaboªqebªCbaÖpªrj_obi* i^)ª_rqªfqªfpªbnrîivªfjmloq^kqªqe^qªqebªjvofâªlcªpjîiª_olhbo,abîbopªalªklqªdbq irj_bobaªtfqeªrkkb`bppôvªobdri^qflk+ªPfjfiôiv)ªprmbosfplopªkbbaªqlª^ppbppªtebk ebadbªcrkap)ª^kaªlqeboªcfk^k`fîªfkpqfqrqflkp)ªb+d+ªjlklifkbªfkprobopªloªmofs^qb bnrfqvªcrkap)ª_b`ljbªplªiôdbª^kaªmoljfkbkqªfkª`boq^fkªhbvªjôhbqpªqe^qªqebfoªc^fi* robª`lriaª`ljmibqbivªafpormqªqebªcrk`qflkfkdªlcªqelpbªjôhbqp+ 30 >ªcroqeboªmol_ * ibjªôfpfkdªcoljªqebª^`qfsfqfbpªlcªebadbªcrkap)ªmofs^qbªbnrfqv)ªmolmªqoâfkd)ªbq`+)ªfp qebªÖòltabaªqoâbÖ+ª>môqªcoljªjlobªobnrfobaªqo^kpmôbk`v )ªfqªfpªeôaªqlªpbbªelt qefpª`^kª_bª^slfaba+ Qefpª`lria)ªmboe^mp)ª_bª^pªjôhbq*obi^qbaªobdri^qflk+ªJloblsboª^pªjôhbqp è^kdbª^kaªabsbilm)ªplªpelriaªqebª?lrkaôvªè^kdb+ª>iplªklqbªqe^qªqebª?lrkaôv albpªabmbkaªlkªqebªbpqfj^qbaªbccb`qpªlcªc^firob+ªLkivªqelpbªfkpqfqrqflkpªplª_fdª^ka `lkkb`qbaªqe^qªqebfoªc^firobªtlriaªafpil`^qbªqebªhbvªcfk^k`fîªjôhbqpªtlriaª_b obdri^qba+ªQebobªfpªklª`^pbªcloªobdri^qfkdªîiª_olhbo,abîbopªloªebadbªcrkap)ªlkivª^ e^kacriªlcªqelpbªqe^qªôbªplªiôdbªqe^qªqebfoªc^firobªtlriaªafpormqªqebªcfk^k`fîªpvp* qbj+ >ªj^gloªmol_ibjªfpªqe^qªqebªjlobªbccb`qfsbªobdri^qflkª_b`ljbp)ªqebªjlob rkmlmriôªfqªtfiiª_b)ªpfk`bªfqªtfiiªmobsbkqªqebªobdri^qbaªcoljªalfkdªte^qªqebvªt^kq qlªal+31 Qebª?lrkaôvªmol_ibjªtfiiªtlopbkªprèªrkmlmriôfqv+ªFqªibâpªqlªqebªcli * Geneva11_latest.qxp 07/05/2009 16:48 Page 71

Appendix: The Boundary Problem in Financial Regulation 71

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72 The Fundamental Principles of Financial Regulation

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Appendix: The Boundary Problem in Financial Regulation 73

ib^pqªfkªobqolpmb`q)ªqe^qªobdri^qlop,prmbo sfplopª^mmbôbaªqlªe^sbª_bbkªlcqbkªibpp qe^kªcriivª^mmofpba)ªfkª/--3,4)ªlcªqebªabsbilmjbkq)ª^kaªfjmif`^qflkp)ªlcªqebªè^fk lcª^ppl`f^qbªbkqfqfbpªqe^qª_^khpªeâªpbqªrmªcloªqefpªmromlpb+ªPljbªlcªqebpbªbkqfqfbp tbobªibdîivªpbmô^qb)ª_rqªobj^fkbaªobmrq^qflkîivª`lkkb`qba+ªFkªqe^qª`^pbªeltªcô tfii)ªloª`^k)ªqebª_^khªtfqefkªqebªobdri^qlovªpvpqbjªîiltªfqp)ªibdîivªpbmô^qb)ª^ppl* `f^qbªlrqpfabªqlªc^fi<ªFcªqebª^kptboªpelriaª_bªqe^qªfqªj^vªklqªcbbiª^_ibªqlªalªpl)ªqebk qebªofphpªe^sbªklqªobîivª_bbkªqo^kpcboobaªlccªqebª_î^k`bªpebbq+ Qebpbªmol_ibjpªlcªpbqqfkd)ª^kaªmlif`fkd)ªqebªobdri^qlo vª_lrkaôvªôbªobîª^ka pbsbob+ªQebobªôbªklªb^pvª^kptbop+ª?rqªmboe^mpªqebªcfopqªpqbmªqltôapªobplisfkdªprè mol_ibjpªbccb`qfsbivªfpªqlª_bª^tôbªlcªqebj+ª>ªdrfafkdªmofk`fmibªtlriaª_bªqlªabpfdk qebªfkqboc^`bª_bqtbbkªqebªobdri^qbaª^kaªqebªrkobdri^qbaªfkªprèª^ªt^vªqe^qªqeb obpriqfkdªfk`bkqfsbªqlªpefcqª_rpfkbppªfkqlªrkobdri^qbaªè^kkbip)ª_b`^rpbªlcªobdri^ * qflk)ªt^pªplªiltªqe^qªfqªkbsboª_b`^jbªpvpqbjf`+ªMboe^mpªlkbª`lkìrpflkªcoljªqefp fpªqe^qªobdri^qflkªpelriaª_bªabpfdkbaªlkivªqlª_fqbªl``^pflkîiv +ªFcªpl)ªqebªqfjb tebkªfqªpelriaª_fqbªfp)ªprobiv )ªarofkdªmboflapªlcªlmqfjfpj)ªofph*pbbhfkdª^kaªo^mfa òbafqªbum^kpflk)ªo^qeboªqe^kª^qªmobpbkqªtebkªobdri^qflkªqbkapªqlª_fqbªeôabpqªgrpq tebkªqebªobdri^qbaªôbªfkª^kvª`^pbªjlpqªofphª^sbopb+ Geneva11_latest.qxp 07/05/2009 16:48 Page 74

Endnotes

. @ol`hbqqª%/---&ªt^p)ªmboe^mp)ªqebªcfopqªqlªao^tªqefpªafpqfk`qflk+ / Qebªqbjmboªlcªqebªqfjbpªfpªfiirpqo^qbaª_vªqefpªm^pp^dbªcoljª^ªm^mboª_vªA^sfp) Mlihª^kaªTôatbii)ª%qebªRPªi^tªcfoj&)ªqlªmolsfabªdrfa^k`bªlkªÖQebªBjbodbk`v B`lkljf`ªPq^_fifw^qflkª>`qªlcª/--5Ö)ª%L`ql_boª1)ª/--5&+ªQebvªtofqb)ªm+ª10)ªqe^q) "Qebª>`qªfpªlkivªqebªcfopqªpqbmªfkªqebªobqrokªqlªebîqeªcloªqebªRPªcfk^k`fîªpvp * qbj+ªQebªfab^ªlcªobpqor`qrofkdªqebªô è^f`ªRPªcfk^k`fîªobdri^qlo vªpvpqbjªe^p _bbkªfkªqebª^`âbjf`ª^foªcloªpljbqfjbª^kaªt^pªob`bkqivªîplªq^hbkªrmª_v Qob^provªfkªfqpª?irbmofkq)ª%QebªAbmôqjbkqªlcªqebªQ ob^provª?irbmofkqªcloª^ JlabokfwbaªCfk^k`fîªObdri^qlovªPqor`qrobªfpprbaªlkªJôèª0.)ª/--5+&ªFqªpelria _bªìbôªqlªîiª_vªkltªqe^qªqebªco^djbkqbaªk^qrobªlcªqebª`roobkqªRPªobdri^qlo v pvpqbjªt^pª^ª`l*`lkpmfo^qloªfkªqebªòb^qflkªlcªqebªjbpp+ªKlkbªlcªqefpªfksîfa^qbp qebªòfqfnrbpªlcªqelpbªtelªe^sbªmlfkqbaªlrqªmol_ibjpªtfqeªqebªPô_^kbp*Luibv >`qª^kaªfqpªfjm^`qªlkªqebª`ljmbqfqfsbkbppªlcªqebªRPª`^mfqîªjôhbqp+ªQebªmol_ * ibjpªôb)ªfkªc^`q)ªiôdboªqe^kªqebªcîpbªafèlqljvª_bqtbbkªobdri^qflkª^kaªabobd* ri^qflk+ªQebvªôbªtlopbªqe^kªqe^q+ªQebªmol_ibjªfpªlkbªlcªfkbccb`qfsbªobdri^qflk ibâfkdªqlªqebªtolkdªqvmbpªlcªfk`bkqfsbpªtfqefkª^ªco^djbkqbaªobdri^qlo vªpqor`* qrobªqe^qªt^pªrk^_ibªqlª`lmbªtfqeªkbtªmolar`qpª^kaªkbtª`fo `rjpq^k`bpªfkª^ è^kdbaªtloia+ªTe^qªfpªkbbabaªfpª^ª`ljmibqbªobloabofkdªlcªqebªpvpqbj)ªfkìra * fkdª_lqeªabobdri^qflkª^kaªob*obdri^qflk)ªabmbkafkdªrmlkªtefèªfpªjlobªbccb` * qfsbªcloªqebªpq^_fifqvªlcªqebªcfk^k`fîªpvpqbj)ªqebª`ljmbqfqfsbkbppªlcªqebªRPª`^m * fqîªjôhbqpª^kaªqebªb`lkljf`ªebîqeªlcªqebª`lrkqo v+ªK^qroîiv)ªqebobªtfiiª_b j^kvªfkqbobpqpªqlª_î^k`bª^kaªqebª^_fifqvªlcªlroªmlifqf`îªibâbopªqlªj^hbªqelpb è^kdbpª`^kklqª_bª^pprjba+" 0 Qebª.-"ªifjfqªcloªabmlpfqª`lk`bkqo^qflkªfkªqebªRP>ª`lriaªpllkª_b`ljbªobib * s^kq+ 1 Qeb A^fiv Qbibdo^me)ªL`ql_boª.)ª/--5+ªLroªqe^khpªôbªarbªqlªOrppbiiªQ ^vilo) tofqboªlcªqebª>ibuª@ôqllk)ªcloªmbojfppflkªqlªobmofkqªqefp+

2 Tefibªqebª`vkf`îªtfiiªklqbªqe^qªprèªorkpªtbobªlkivªabi^vbaª_vª^ªcbtªnrôqbop) qebª_ob^qefkdªpm^`bªd^fkbaªjfdeqªe^sbªîiltbaªqebªòfpfpªqlª_bªobplisbaªtfqe

74 Geneva11_latest.qxp 07/05/2009 16:48 Page 75

Endnotes 75

jrèªibppªilpp+ 3 DJ)ªeltbsbo)ªe^pªôdrbaªqe^qªfcªqebobªpelriaª_bª`ljjlkªprmmifbop)ªqebkªfqp c^firobª`lriaªâsbopbivªob_lrkaªlkªCloaª^kaª@eo vpiboª_vª`^rpfkdªqebª_^kh * ormq`vªlcªprèªprmmifbop+ 4 >kªâafqflkîªobi^qbaªmol_ibjªfpªqebªjrqrîªfjm^`qªlcªabìfkbpªfkªqebªòbafq pq^kafkdªlcª`lrkqbomôqfbp+ªFcª_^khª>ªe^pª^kªLQ@ªì^fjªlkª_^khª?)ªtelpbªòba* fqªfpªaltkdoâba)ªqebªkbqªtloqeªlcª_^khª>ªtfiiªabìfkb)ª^kaªsf`bªsbop^+ªFcª_lqe pelriaªl``roªpfjriq^kblrpiv )ªqebkªfkªmrobªjôh*ql*jôhbqª^``lrkqfkd)ªqebob pelriaª_bªklªè^kdbªfkªkbqªtloqe)ª^pªqebªsîrbªlcªb^èª_^khÖpªif^_fifqfbpªe^p abìfkbaª_vªqebªp^jbª^jlrkqª^pªfqpª^ppbqp)ª_rqªfqªfpªôqfcf`fîªcloª^ª_^khªqlªq^hb òbafqªcloªqebªsfbtªqe^qªfqªfpªibppªifhbivªqlªobm^vªfqpªif^_fifqfbp+ 5 Qebªefpqlof`îªob`loaªprddbpqpªqe^qª_^khªc^firobpª`^kªl``roªnrfqbªpraabkivªtfqe* lrqª^kªl_pbos^_ibªmofloªpqbâvªabìfkbªfkª`^mfqîªo^qflp+ªPlªqebª`lj_fk^qflkªlc M@>ª^kaª^ªjfkfjrjª`^mfqîªo^qflªj^vªklqª_bªbklrdeªqlªmolqb`qªqebªabmlpfq fkpro^k`bªcrka)ª^kaªebk`bªqebªqûm^vbo +ªQefpªfpªlkbªlcªqebªôdrjbkqp)ªafp * `rppbaªi^qboªfkª@e^mqboª0)ªcloªbuqbkafkdªjfòl*morabkqfîªprmbo sfpflkª_bvlka qebªo^khpªlcªiôdbª^kaªpvpqbjªfkpqfqrqflkp+ 6 Jfkfjrjªifnrfafqv)ªloª`^peªo^qflp)ªôb)ªlcª`lropb)ªmlloªfab^pªpfk`bªqebª^ppbqpªp^q* fpcvfkdªqe^qªjfkfjrjª`^kklqª_bªrpba+ªEliafkdª^ppbqpª^pª^ªmolmloqflkªlcªtelib* pîbªcrkafkdªfpª_bqqbo)ª_rqªte^qªfpª^`qrîivªkbbabaªfpª^ª`lrkqbo*`vìf`îªjb^prob+ Dllaeôqª%/--6&ªprddbpqpªlkbªprèªmlppf_fifqv8ªMbolqqfª^kaªPrôbwª%/--6& ^klqebo+ .- QebªB@?ªtlriaª_bªob`^mfqîfpbaª_vªfqpª`lkpqfqrbkqªK@?p+ .. FkªpljbªpbkpbªqefpªabmbkapªlkªqebªabcfkfqflkªlcªÖâbnr^qbÖ+ªªTe^qªt^pªobdôa * ba)ªfkª?^pbiªFª^kaªFF)ª^pªâbnr^qbªìbôivªqrokbaªlrqªklqªqlª_bªpl)ª_rqªtfqeªprc * cf`fbkqivªefdeª`^mfqî)ª%te^qbsboªqe^qªjfdeqª_b&)ªqefpª_bifbcªtlriaªe^sbª_bbk _bqqboªclrkaba+ ./ E^sfkdª^ªjfkfjrjª`^mfqîªo^qfl)ª^pª^ªmolqb`qflkªcloª_^khp)ªfpªgrpqª^pªpfiivª^pª^ jfkfjrjª`^peªo^qfl)ªpfk`bªfqª_b`ljbpªrkrp^_ib+ªT bªalªâsl`^qbªe^sfkdªprè ^ªjfkfjrj)ª_rqª^pª^ªmolqb`qflkªcloªqebªabmlpfqªfkprobo )ª^kaª^ªqofddboªclo moljmqª`loob`qfsbª^`qflk)ª^kaªklqªfkª^kvªt^vªobi^qbaªqlªqebªkbbaªcloªobpfifbk`b fkªqebª_^khfkdªpb`qlo+ .0 Rkaboªte^qª`fo`rjpq^k`bpªtlriaªjôh*ql*jôhbqª_bªprpmbkabaª^kaª_vªtelpb p^v*pl<ªTe^qªîqbok^qfsbªtlriaª_bª^mmifba<ªEltªtlriaªqe^qªpnrôbªtfqeªqeb fabîªlcªqo^kpmôbk`v< .1 Qla^vªqebªafsbodbk`bªfpª^pªjrèª^pª2-"ªlcªqebª^ppbq+ª>ppbqpªtebobªabifknrbk * `vªo^qbpªôbªibppªqe^kª/-")ªôbªqoâfkdªtfqeª^kª5-"ªafp`lrkqªqlªmô +ª .2 Pbbª@ol`hbqqª%/---&ª"JôovfkdªqebªJfòl*ª^kaªJ^òl*MorabkqfîªAfjbkpflkpªlc Cfk^k`fîªPq^_fifqv"ª?^khªcloªFkqbok^qflkîªPbqqibjbkqpªafp`rppflkªm^mbo +ª>ªcî* i^`vªlcª`ljmlpfqflkªôfpbpªtebkªlkbªfkcbopªqe^qªpljbqefkdªfpªqorbªcloªqebªtelib coljªqebªc^`qªqe^qªfqªfpªqorbªcloªb^èªlcªqebªfkafsfarîª`ljmlkbkqpªlcªqebªtelib+ PbbªJloofpª^kaªPefkª%/--5&ª"Cfk^k`fîªObdri^qflkªfkª^ªPvpqbjª@lkqbuq"ªcloqe * `ljfkdªfkªqebª?ollhfkdpªM^mbopªlkªB`lkljf`ª>`qfsfqv + .3 CP>ªDrfa^k`bªKlqbª1ª%/--/&)ª"Obpfifbk`bªqbpqªcloªfkprobop"+ªPbbªîplªCP>ªMobpp Obib^pb)ªGrkbª/5qeª/--/)ªklªCP>,MK,-4.,/--/)ª"CP>ªfkqolar`bpªkbtªbibjbkqªql ifcbªfkprobopÖªobpfifbk`bªqbpqp"+ .4 JôhbqªIfnrfafqvª^kaªCrkafkdªIfnrfafqv )ªJ+ª?orkkbojbfboª^kaªI+ªMbabopbk %/--6&)ªObsfbt lc Cfk^k`fî Pqrafbp+ Geneva11_latest.qxp 07/05/2009 16:48 Page 76

76 The Fundamental Principles of Financial Regulation

.5 Ifnrfafqvª?i^`hªElibp)ª>+ªMbop^ra)ªT faboªAfp`rppflkªM^mboªKlª/--/,0.) eqqm7,,3/+/04+.0.+/0,mr_if`^qflkp,amp,amp/--/,amp/--/*0.+mac+ª .6 >aof^kª^kaªPefkª%/--4&ª"Ifnrfafqvª^kaªIbsbo^db"ªcloqe`ljfkdªfk Glrokî lc Cfk^k`fî Fkqbojbaf^qflk+ /- Qefpªqoâfqflkîªobpmlkpb)ªj^vªe^sbª_bbkªbolabaª_vªqebªqobkaªfkªqebªjlpq ob`bkqª_lljªcloªeljbªltkbopªqlªqo vªqlª_bkbcfqªcoljªiltboªfkqbobpqªo^qbpª^ka efdeboªeljbªsîrbpª_vªcobnrbkqªobpbqqfkdªlcªjloqd^dbp+ª /. Db^k^hlmilpª^kaªMlibjô è^hfpª%.653&)ª"Bufpqbk`b)ªObdriôfqv )ª^ka @lkpqo^fkbaªPr_lmqfjîfqvªlcª@ljmbqfqfsbª>iil`^qflkªTebkªqebª>ppbqªJôhbq fpªFk`ljmibqb"ªfkªEbiibo )ªPqôo )ªPqôobqqª%Bap+&ª Rk`boq^fkqv) Fkcloj^qflk ^ka @ljjrkf`^qflk) Bpp^vp fk Elklo lc Hbkkbqe G+ >oolt)ªS li+ª0)ª@^j_ofadb RkfsbopfqvªMobpp)ª@^j_ofadb)ªRH+ // Tefibªjlpqª`roobkqªofphªjb^probpªifhbªS îrb*^q*Ofphª%SÔ&ªcl`rpªlkªqebªofphªlc ^kªfkafsfarîªcfk^k`fîªfkpqfqrqflk)ª>aof^kª^kaª?orkkbojbfboª%/--5&ªabsbilmª^ kbtªofphªjb^prob)ª"@lS Ô)"ªqe^qªbumif`fqivªq^hbpªqebªofphªpmfiilsbopªfkql ^``lrkq+ª /0 Lkªkbqtlohªbccb`qp)ªpbbª"Ab`fmebofkdªqebªIfnrfafqvª^kaª@obafqª@orkè" ?orkkbojbfboª%/--6&) Glrokî lc B`lkljf` Mbopmb`qfsb /4%.&+ /1 Qla^v)ªqefpªklqflkªe^pª_bbkªmlmriôfpbaª_vªK^pfjªQ îb_ª^pª^ª"_i^`hªpt^k+" /2 Obdobppfkdª^kªfkabuªlcªcfk^k`fîªfkpqfqrqflkpªloª_^khªUÖpª`lrkqbomôqfbpªlk _^khªUªtfqeªnr^kqfibªobdobppflkpªfpªlkbªqo^`q^_ibªt^vªqlªbpqfj^qbªqebª%klk* qfjbsôvfkd&ª@lSÔ+ªCloªjlobªabq^fipªpbbª>aof^kª^kaª?orkkbojbfboÖpªtlohfkd m^mboªqfqibaª"@lS Ô")ª eqqm7,,ttt+mofk`bqlk+bar,{jôhrp,obpbôè,m^mbop ,@lSÔ+ªQebªtlohª_vªPbdlsf^kl)ªlcªqebªFJC )ª^kaªDllaeôqª%/--6&ªbu^jfkfkd qebªbccb`qªlkªqebªMol_^_fifqvªlcªAbc^riqªlcªlqeboª_^khpªfkªqebªpvpqbj)ª`lkaf * qflkbaªlkªqebªc^firobªlcª^kvªpmb`fcf`ª_^kh)ªfpª^klqeboªbubo `fpbªfkªqefpªp^jb dbkob+ /3 Qebªp^jbª"`lkafqflkfkd*jbqela"ª`^kª_bªrpbaªcloª^kvªofph*jb^probª^kaªfpªklq obpqof`qbaªqlªSÔ)ªtefèªfpªklqªqebªfabîªofphªjb^prob+ªQebª"`l*bumb`qbaªpeloq * cîi"ªfpª^kªîqbok^qfsbªpmfiilsboªofphªjb^prob+ /4 JâlccÖpªcrkaªafaªklqªrpbª^ªpbmô^qbªmofjbª_olhbo )ªpfk`bªebªeâªefpªltkª_ol * hbo,abîboª_rpfkbpp+ªQefpªt^pª^hfkªqlªîiltfkdªcolkqª^kaª_^`hªlccf`bpªqlªjbodb) ^kaªpelriaªkbsboªe^sbª_bbkªîiltba+ /5 Lkbªmlppf_ibªt^vªqlªfkòb^pbªqebªafp`fmifkbªlkªqebªobdri^qlop,prmbosfplopªtlria _bªcloªqebjªqlªafpìlpbª^kaªafp`rppªqebfoªifpqªfkª^ªìlpbaªpbppflkª_bclobª^ªPbib`q @ljjfqqbbªlcªqebfoªIbdfpi^qrobªlk`bªbsbo vªvbô+ /6 Qebªj^qrofqvªâgrpqjbkqªfkªqebªFO?ª^mmol^èªlcª?^pbiªFFª`^kª_bªpbbkª^pª^ªolrde ^qqbjmqªqlªq^hbªfkqlª^``lrkqªqebªmlppf_fifqvªlcªaltktôapªo^qfkdªjfdo^qflk+ 0- Lkªqefpªqlmf`)ªob`bkqªm^mbopª_vª>èôv^ª^kaªVlorij^wbo)ª^kaª_vªT+ªT^dkboªôb dboj^kb+ 0. Pbbª?orkkbojbfboª%/--6&)ª"Ab`fmebofkdªqebªIfnrfafqvª^kaª@obafqª@orkèª/--4* -5") Glrokî lc B`lkljf` Mbopmb`qfsbp) /4%.&+ 0/ Fcª^ªpr_pfafô v)ªloª^ª_o^kè)ªlcª^ªclobfdk*ltkbaª_^khªpfqbaªfkªpljbª`lrkqo v) %bpmb`fîivªfkª^kªlcc*pelobª`bkqob&)ªt^pªmofjôfivªbkd^dbaªfkªclobfdk*`roobk`v ) bkqobmlq)ª_rpfkbpp)ª%b+d+ªfkqbojbaf^qfkdªfkªbrol*jôhbqp&)ªtbªtlriaª^pprjb qe^qªqebªelpqª`lrkqo vªtlriaªklqª`^qbdlofwbªqe^qªpr_pfafô v,_o^kèª^pª_bfkd Öpvpqbjf`Öªfkªfqpªltkªjôhbq+ªMboe^mpªclobfdk*ltkbaª_^khpªjfdeqªt^kqªql afsfabªqebfoªlmbo^qflkpªfkª^ªelpqª`lrkqovªfkqlªqtlªmôqp)ª^ªklk*pvpqbjf`ª_o^kè Geneva11_latest.qxp 07/05/2009 16:48 Page 77

Endnotes 77

orkkfkdªc+`+ªbkqobmlqªlmbo^qflkp)ª^kaª^)ªmlppf_ivªpvpqbjf`)ªpr_pfafô vªabîfkd j^fkivªfkªelpqª`lrkqovª_rpfkbpp+ 00 >_obrª^kaª?orkkbojbfboª%/--0&ª"?r__ibpª^kaª@o^pebp"ªfkªB`lkljbqof`^ªmol * sfabªqeblobqf`îªob^plkfkdªtevªo^qflkîªqoâbopªmobcboªqlªofabªqebª_r__ibªo^qebo ^qq^`hª^d^fkpqªfq+ª?orkkbojbfboª^kaªK^dbiÖpª%/--1&ª Glrokî lc Cfk^k`b ôqfìb "EbadbªCrkapª^kaªqebªQbèklildvª?r__ib"ªmolsfabpªbjmfof`îªprmmloqªcloªqefp cfkafkd+ 01 Tbª`lkqfkrbªqlªprmmloqªqebªâlmqflkª^kaªj^fkqbk^k`bªlcªfkci^qflkªqôdbqp) ^kaªfkqbobpqªo^qbªmlif`vªfpªmofjôfivªmobaf`^qbaªqlªqebª^èfbsbjbkqªlcªprèªqô * dbqp+ 02 Mboe^mpªtfqeªpîôfbpª%^kaªmbkpflkp&ªcloªpbkfloªlccf`fîpªfksbopbivªobi^qbaªqlªqeb jb^probaªmol_^_fifqvªlcªabc^riqªlcªqebªiôdbpqªcfsbª_^khpªfkªqebª`lrkqo v< 03 LkªqebªPm^kfpeªmol`barobp)ªpbbªGfjbkbwª^kaªP^rofk^ª%/--3&ª^kaªabªIfp)ªbqªî) %/---&+ 04 Qebªa^kdboªlcªibsbo^dbªfpªdob^qbo)ªqebªtlopbªqebªjfpj^qèª_bqtbbkªcrkafkdª^ka ^ppbqªj^qrofqfbp+ªQebªtbfdeqªqlª_bªmi^`baªlkªibsbo^dbªo^qflpªfkªj^òl*morabk * qfîª@>Opªpelriaªsô vªfksbopbivªtfqeªqebªabdobbªqlªtefèªlroªmolmlpîpªlk Ifnrfafqvª%@e^mqboª2&ªôbªâlmqba+ 05 Cloª^ªjlobªabq^fibaªbumi^k^qflkªlcªqefpª^ppbppjbkqªlcªqebª`roobkqª^mmol^èªql obdri^qflkªpbbªKrdbbª^kaªMbop^raª%/--3&+ 06 PbbªMbop^raª%/---&+ 1- Pbb)ª"JôhbqªIfnrfafqvª^kaªCrkafkdªIfnrfafqv")ª%/--6&)ª Obsfbt lc Cfk^k`fî Pqrafbp+ 1. Fkªqebªcfopqªjbbqfkdªlcªqebª?^pibª@ljjfqqbbªlcª?^khªPrmbo sfplopª%?@?P&ªfk Cb_orôvª.642)ªqebª@e^foj^kªDblodbª?irkabk)ªp^faªÖ*ªqebª@ljjfqqbbÖpªj^fk l_gb`qfsbªt^pªqlªebimªbkprobª_^khªplisbk`vª^kaªifnrfafqvÖ+ª"Coljªqebªlrqpbq)ªqeb ?@?Pª^mmob`f^qbaªqe^qªplisbk`vª^kaªifnrfafqvªtbobªfkqbo*obi^qba8ª_lqeªtbob bppbkqfîªcloªqebªpq^_fifqvª^kaªpro sfsîªlcª^ª_^khfkdªpvpqbj+ª>kªfiifnrfaª_^kh %pvpqbj&ªtlriaªklqªobj^fkªplisbkqªcloªilkd)ªkloª^kªfkplisbkqª_^khª%pvpqbj& obj^fkªifnrfa")ª@+ª>+ªB+ªDllaeôq)ªfkª^ªcloqe`ljfkdªslirjbªlkªqebªefpqlo vªlc ?^pibª.+ 1/ Jrèªlcªqefpªôdrjbkqªt^pªclobpeâltbaªfkªOlekboª^kaªPebmebôa*T îtvk %/---&)ªbpmb`fîivªqebªm^pp^dbªfkªPb`qflkª1ªlkªÖQebªfkqbo^`qflkª_bqtbbkª`^mfqî ^kaªifnrfafqvªj^k^dbjbkqÖ+ 10 >kªâabaªpvpqbjf`ªofphªfkªqebªRHª`^pbªt^pªqe^qª^ªpfdkfcf`^kqª^jlrkqªlcªtelib* pîbªcrkafkdªt^pªbuqbokîªqlªqebªRH+ªTebkªqebªòfpfpªefq)ªqebobªt^pª^ª"praabk pqlm"ª^kaªifqqibªobqrokªlcªqefpªplro `bªlcªcrkafkd+ 11 Fkqbobpqfkdiv)ª`^prîªl_pbo s^qflkªprddbpqpªqe^qªqebªabdobbªqlªtefèªabj^ka abmlpfqpªôbªcllqillpbªloªtbaªqlªqebª_^khª`^kª_bªl_pbo sbaª_vªqebªibsbiªlcªvfbia lccboba+ªIbppªilvîªabmlpfqlopªobnrfobª_^khpªqlªlccboªefdeboªo^qbpªlcªfkqbobpqªql ^qqo^`qªqebfoªabmlpfqp+ 12 >iqelrdeªcfk^k`fîªpq^_fifqvª`lk`bokpªôbªkltªmô^jlrkq)ªtebkªtbªdbqªlrqªlc qebªòfpfpªfksbpqloªmolqb`qflkª`lk`bokpªtfiiªobproc^`b+ªªPlªtbªpelriaªklqªqefkh qe^qªtbª`lriaªe^sbª^``lrkqfkdªmofk`fmibpªcloªqebªcfk^k`fîªpb`qloªafccbobkqªcolj qelpbª^mmifbaªqlªqebªklk*cfk^k`fîªpb`qlop+ªª>pªqebªSf`b*MobpfabkqªlcªqebªPm^kfpe PB@)ªC+ªObpqlv)ªªpq^qbaª%/--5&)ª"Rpfkdªmorabkqfîªmlif`vªqllipªtlriaªpbbjª^ªjlob bccf`fbkqªt^vªqlªâaobppªcfk^k`fîªpq^_fifqvª`lk`bokpªqe^kªafpqloqfkdªqebªòfqbof^ rpbaªqlªobmloqªcfk^k`fîªfkcloj^qflk+"ªªT bªqe^khªO^c^biªObmriilªcloªqefpªobcbo * Geneva11_latest.qxp 07/05/2009 16:48 Page 78

78 The Fundamental Principles of Financial Regulation

bk`b+ 13 Pbbª"Ob^plkªtfqeªqebªjbppbkdbo8ªalkÖqªpellqªefj7ªsîrbª^``lrkqfkd)ªofphªj^k * ^dbjbkqª^kaªcfk^k`fîªpvpqbjªobpfifbk`b+"ª> sfk^peªMbop^ra)ª SluBR+lod)ª./ L`ql_boª/--5)ª^kaª"Kbtªqtfpqªlkªjôhbqªqlªjôhbqªpqfopªab_^qb)ª Cfk^k`fî Qfjbp)ªKlsbj_boª0-)ª/--5+ª 14 Fqªpelriaª_bªklqbaªqe^qªtebobª_^khpªe^sbª^qqo^`qbaªabmlpfqpªqeolrdeª^_lsb klojîªfkqbobpqªo^qbp)ªqebvª^mmbôªqlªe^sbª`^mqrobaªqebªjlobªcllqillpbªabmlp * fqlopªtelªôbªnrf`hboªqlªabmôqª^qªqebªcfopqªpfdeqªlcªqolr_ib+ªMboe^mpª^ªjb^prob lcªqebªilkdbsfqvªlcªqebªabmlpfqªfpªeltªmlloªqebª`ljmbqfqfsbªfkqbobpqªo^qbªfp)ª^ Afsfpf^ª^mmol^è+ 15 Cloª^ppbqpªlqeboªqe^kªil^kpªtbªjb^probªjb^probaª^pªqebª^sbo^dbªqfjbªfqªq^hbp qlª_bªm^faª_^`hªqebª`roobkqªsîrbªlcªqebª^ppbq 16 QlªnrlqbªQelj^pªErboq^p)ªAfob`qloªlcª?^khfkdªPb`qloªObdri^qflkª^qªqebªRH CP>7ª "ñPrmbosfplopªtfiiªq^`hibªobjrkbo^qflkªmlif`fbp+ªCfojpªqebjpbisbpªe^sb âjfqqbaªqe^qªobjrkbo^qflkªmlif`fbpªj^vªe^sbª_bbkª^ª`lkqof_rqlovªc^`qloªqlªqeb cfk^k`fîªòfpfp+ªT bª`lk`ro)ª^kaªe^sbªqebobclobªtofqqbkªqlªqebª@BLpªlcªj^glo cfojpªqlª^pprobªqe^qªcfojpÖªobjrkbo^qflkªmlif`fbpªôbª`lkpfpqbkqªtfqeªplrkaªofph j^k^dbjbkq+ªTbªtfiiªîplªtlohªtfqeªlqeboªobdri^qlopªfkª_lafbpªprèª^pªqeb Cfk^k`fîªPq^_fifqvªClorjªqlª^pprobªqe^qªqefpªmol_ibjªfpªq^`hibaªlkª^ªdil_î _^pfp"+

2- Obdri^qlopª^mmbôªqlª^dobbªtfqeªqefpª^ppbppjbkq+ªQ lªnrlqbªQelj^pªErboq^p ^d^fk7ª"Lroª`lk`bokªfpªklqªtfqeªqebªibsbiªlcªm^v+ªTbªe^sbªklªl_gb`qflkªqlªmbl* mibªbôkfkdªefdeª`ljmbkp^qflk)ªmolsfabaªqebvªbôkªfqªfkª^ªt^vªqe^qªfpª`lkpfp * qbkqªtfqeªplrkaªofphªj^k^dbjbkq+++" 2. Qebªtlopbª`lkcif`qªfpªfkªqebfoª`lkpriq^k`vª^kaªâsfplo vª^`qfsfqv+ 2/ Pbbª?orkkbojbfboª%/--6&)ª"Ab`fmebofkdªqebªIfnrfafqvª^kaª@obafqª@orkèª/--4* -5"ªcloª^ªqeblobqf`îªbumi^k^qflkªeltªkbqtlohªbccb`qpªfkªlsboªqebª`lrkqbo*jô* hbqªôo^kdbjbkqpª`^kªibâªqlªâsbopbª^jmifcf`^qflkp+ 20 >kvªmlqbkqfîªâafqflkîª_roabkªlkªqebªobdri^qbaª`lria)ªfkªmofk`fmib)ª_bªlccpbq _vª^ªobalr_ibaªbccloqªqlªeôjlkfwbªobmloqfkdªobnrfobjbkqpª^kaªabcfkfqflkp ^òlppª`lrkqofbp+ 21 Qebªlkivªplro`bªlcªfkqbok^qflkîªcrkafkdªcloªòfpfpªj^k^dbjbkqªfpªqebªFJC+ª?rq qebfoª^s^fi^_ibªobplro `bpªôbªobi^qfsbivªpjîi)ªatôcbaªfkªpfwbª_vªqebªcrkap ob`bkqivª^mmifbaªfkªabsbilmbaª`lrkqofbpªqlªob`^mfqîfpbªqebfoªltkª_^khfkdªpvp * qbjp+ª@îipªqlªdfsbªqebªFJCªdob^qboªobpmlkpf_fifqfbpªe^sbªklqª_bbkªj^qèbaª_v jb^probpªqlªdfsbªqebjªdob^qboªobplro `bpªloªlqeboªfkpqorjbkqpªlcª`lkqoli+ Tfqelrqªqebªi^qqbo)ªqebvª`^kklqªobîfpqf`îivª^pprjbªqebªclojbo+ 22 Qebªob`bkqª@BMPªQ ^phªClo `bªObmloqª%Ab`bj_boª.)ª/--5&)ªlkªÖ@lkòbqbªPqbmp qltôapªJlobªFkqbdo^qbaªCfk^k`fîªLsbopfdeqÖ)ªmolmlpbpªrpfkdªqebªBrolmb^k Fksbpqjbkqª?^khª%BFO&ªcloªqefpªmromlpbª%Pb`qflkª0+0&+ªTefibªtbªtbi`ljbªqebfo ^mmob`f^qflkªlcªqefpªfpprb)ªtbªcbôªqe^qªqebªmlqbkqfîªp`îbªlcªcfp`îªobnrfobjbkq) ^pªbsfabk`baªfkªqebª`roobkqªòfpfp)ª`lriaª_bªtbiiª_bvlkaªqebªBF?Öpªcfk^k`fî `^m^`fqfbp)ªbsbkªfcªfqªtbobªqlª`îiªrmlkªîiªfqpªâafqflkîª`^mfqîªobplro `bp+ Jloblsbo)ªqefpªtlriaªibâªqebªBF?ªqltôapª_b`ljfkdªqebªj^fkªobdri^qlo v ^rqelofqv8ªtlriaªqe^qª_bª^ªtbi`ljbªabsbilmjbkq< 23 Qelrdeªklqªplªfkªbsbo vª`^pb+ªFkªpljbª`^pbpªobdri^qflkªj^vªo^fpbªmolcfq^_fifqv cloªdllaªob^plkpª%fkòb^pfkdªabj^kaª^pª^ªobpriqªlcªbke^k`baª`lkcfabk`bªfkªqeb Geneva11_latest.qxp 07/05/2009 16:48 Page 79

Endnotes 79

nrîfqvªlcªqebªmolar`q&ªloªcloª_âª%òb^qfkdª_ôofbopªqlªbkqo vª^kaªobpqof`qfkd `ljmbqfqflk&+ªFª^jªdo^qbcriªqlªD^sfkª?fkde^jª^kaªqlªBs^ªErmhbpªcloªqefpª^ka lqeboªebimcriª`ljjbkqp+ 24 Qelrdeªfqªhbbmpªlkª_bfkdªobsfpfqba8ªQbipbo)ªI+D+ª%/--5&ªfpª^ªob`bkqªbu^jmib+ 25 Qefpªalbpªklqªoribªlrqª^kvªolibªcloªnr^pf*mr_if`ªrqfifqfbpªfkªqebªcfk^k`fîªpvpqbj+ Mr_if`ªpb`qloªkôoltª_^khp)ªifhbªMLP?ªfkªqebªRHªloªMlpqcfk^k`bªfkªPtfqwboi^ka) `^kª`lkqfkrbªqlªmolsfabªrpbcriªpbo sf`bp)ªbpmb`fîivªfcªqebfoªpbo sf`bpªôbªmof`ba ^mmolmof^qbiv+ª>iplªqebobª`^kªlcqbkª_bª^ªolibªcloª^ªnr^pf*mr_if`ªpb`qloªrqfifqvªfk cfk^k`fîªjôhbqªfkco^pqor`qrobp+ 26 >kaªfkªlm*baªôqfìbpªfkªqebªCfk^k`fî Qfjbp)ªÖ>ªmolmlpîªeltªqlª^slfaªqebªkbuq ò^peÖ)ªG^krôvª0-)ª/--5)ª^kaªÖ>ªmôqvªmllmboÖpªdrfabªqlªcfk^k`fîªpq^_fifqvÖ)ªGrkb 1)ª/--5)ª_vªDllaeôqª^kaªMbop^ra+ªQerpªfkªqebªclojboªm^mbo )ª "Tbªmolmlpbªqe^qª_^khª`^mfqîªobnrfobjbkqpªpelriaªklqªlkivª_bª`lkqo^*`vìf * `îª_rqªîplªobi^qbaªqlªqebªo^qbªlcªè^kdbªlcª_^khªibkafkdª^kaª^ppbqªmof`bpªfkªqeb obibs^kqªpb`qlop+ªQebª`^mfqîªâbnr^`vªobnrfobjbkqªlkªjloqd^dbªibkafkdª`lria _bªifkhbaªqlªqebªofpbªfkª_lqeªjloqd^dbªibkafkdª^kaªelrpfkdªmof`bp)ª^kaªibkafkd qlª`lkpqor`qflkª^kaªmolmboqvª`ljm^kfbpªqlªqebªofpbªfkªprèªibkafkdª^kaªfkª`lj* jbo`fîªmolmboqvªmof`bp+"

3- Qebª@bkqoîª?^khªqe^qªe^pªqofbaªeôabpqªqlªfkqolar`bª`lrkqbo*`vìf`îªjb^probp fpªqebª?^k`lªabªBpm^„^)ªklq^_ivªtfqeªfqpªqfjb*sô vfkdªobnrfobjbkqpªcloªil^k ilppªmolsfpflkfkd)ªpbbªabªIfp)ªbqªîª%/---&+ªRkcloqrk^qbivªqebª^mmif`^qflkªlcªqeb i^qbpqªfkqbok^qflkîª^``lrkqfkdªoribpªjb^kpªqe^qªqefpªjb^probªj^vªkltªe^sb qlª_bª^_^kalkba)ªloª^qªib^pqª`ljmibqbivªob`^pq+ªKbsboqebibpp)ªabpmfqbªe^sfkdª^ `lkpqor`qflkª_lljªcôªiôdboªmolmloqflkîfqvªqe^kªfkªqebªRP>ªloªqebªRH)ªqeb _^khfkdªpvpqbjªfkªPm^fkªe^p)ªplªcô )ª_bbkªobi^qfsbivªrk^ccb`qbaª_vªqebªfkqbok^ * qflkîªcfk^k`fîªqrojlfi+ 3. Bsbkªebobª^ª_lrkaô vªmol_ibjªlcª^ªhfkaªobj^fkp+ª@^peªfpªdrô^kqbbaª^d^fkpq abc^riq8ªrkaboªÖcobbª_^khfkdÖªabmlpfqpªôbªklq+ªPlªfkªdllaªqfjbpªmblmibªmi^`b qebfoªjlkbvªfkª_^khªabmlpfqp)ªtfqeao^tfkdª_^`hªqlª`^peªfkªòfpbp)ªqebob_vªbu^`* bo_^qfkdªqebªòfpfp+ªT fqelrqªqefpª_lrkaô vªmol_ibj)ªÖcobbª_^khfkdÖªgrpqªjfdeq e^sbª_bbkªsf^_ib+ 3/ QefpªplirqflkªfpªpfjfiôªqlªqebªlkbªmolmlpbaªfkªEÎmhbpª%/--1&)ªÖMolqb`qªcrk` * qflkp)ªklqªfkpqfqrqflkpÖ+ªFkªâafqflk)ªqe^qªôqfìbªprddbpqpªqe^qªpljbªòfqf`îªcrk`* qflkpª`lriaª_bªmboclojbaª_vªnr^pf*mr_if`ªrqfifqfbpª%b+d+ª@IPª_^kh&+ªKlqbªqe^qªqeb RPªalbpªe^sbª^ª.-"ªifjfqªlkªqebªjôhbqªpeôbªlcª_^khpªfkªaljbpqf`ªabmlpfqp %pr_gb`qªqlªpljbªbu`bmqflkp)ªmirpªâafqflkîªifjfqpªcloª_rpfkbppªfkªfkafsfarî pq^qbp&+ªLkbª`lkpbnrbk`bªlcª^ªoribªqe^qªobnrfobpª^kª^`qfsfqvªqlª_bªobdri^qbaªlk`b ^ª`boq^fkªpfwbªfpªob^èbaªfpª^ªìrpqbofkdªlcª^`qfsfqfbpªgrpqª_biltªqebª`bfifkd+ªQefp prddbpqpªqe^qªfqªpbo sbpª^pª^ª_lrkaô v+ªPrèªoribpªbufpqªcloªpljbªqoâfkdª^`qfsf * qfbp+ 30 >iqelrdeªòbafqªo^qfkdpª^dbk`fbpªe^sbªmi^vbaª^kªfkcirbkqfîªolib)ªqebªc^firobªlc lkbªlcªqebª_fdªlkbpªtlriaª_bª^ªkrfp^k`b)ª_rqªtlriaªklqª`ljmibqbivªafpormq cfk^k`fîªjôhbqp+ªQebobªfpªklª`^pbªcloªqebfoªobdri^qflkªrkaboªqefpªòfqboflk+ 31 Cloªprèªob^plkpª?^pbiªFFªt^pªo^qeboªmlmriôªtfqeªqebªiôdbªfkqbok^qflkîª_^khp+ Arofkdª_lljpªtebkªqebpbª_^khpªt^kqbaªqlªbum^ka)ª?^pbiªFFªmolsfabaªklª`lk * pqo^fkq+ªArofkdªqebªi^qbpqªcfk^k`fîªòfpfp)ªtebkª^ª`lj_fk^qflkªlcªm^kf`)ªjôhbq clo`bpª^kaªpbic*mobpbos^qflkªe^pª_bbkª`^rpfkdª_^khpªqlª`rqª_^`hªlkªibkafkdª^ka qlªabibsboª^kveltªqebvª`^kªqebkª_i^jbªqebªobdri^qlopªcloªqebfoªobpqof`qfsbªmlif* Geneva11_latest.qxp 07/05/2009 16:48 Page 80

80 The Fundamental Principles of Financial Regulation

`fbp+ 32 >ªj^gloªmol_ibjªtfqeªqebªpqo^qbdvªlcªlofdfk^qbªqlªafpqof_rqbªt^pªqe^qªqebªafp * qof_rqflkªt^pªlcqbkªmelkv )ªlofdfk^qbª^kaªmobqbkaªqlªafpqof_rqbªqlª^ppl`f^qba `lkarfqp)ªPFSp)ªbq`+)ªtefèªtbobªlcqbkªôqfcf`fîivª_bvlkaªqebª_lrkaô v)ª_rq tebobªqebªofphª^kaª_î^k`bªpebbqª_roabkªciltbaª_^`hªqlªqebªj^fkª_^khª^pªpllk ^pªqebªjôhbqªqrokbaªplro+ªTefibªclo`fkdªîiª_^khpªqlªobq^fkªpljbªobpfarîªmol* mloqflkªlcªpb`rofqfpbaªmolar`qpªj^vªtbiiª_bªabpfo^_ib)ªfkªloaboªqlªbk`lro^db molmboivªafifdbkqªjlkfqlofkd)ªqebª_^khpªqe^qªdlqªfkqlªtlopqªqolr_ibªtfqeª@ALp ^kaªOJ?Pªtbobªqelpbªqe^qªobq^fkba)ªloªtbobªclo `baªqlªq^hbª_^`hªlkqlªqebfo _llhp)ªqllªjrèªlcªprèªmolar`qp+ 33 Cloªbu^jmibªqebªmolsfpflkªlcªabmlpfqªfkpro^k`bªqlª_^khªabmlpfqlopªpelria îiltª_^khpªqlªl_q^fkªobq^fiªcrkafkdªjlobªèb^miv + 34 >ªhbvª`ljmlkbkqªlcªqfjb*sôvfkdªobdri^qlovª`lkqolipª`lriaª_bªqebªfjmlpfqflk lcªqfjb*sôvfkdªrmmboªifjfqpªlkªil^kªqlªsîrbªo^qflpªcloªobpfabkqfîªjloqd^dbp+ Prèªifjfqpª`^kª_bªb^pfivª^slfabaª_vªe^sfkdª^ªjôhbqªcloªpb`lkaªjloqd^dbp)ªlo _vª_llhfkdªprèªjloqd^dbpª^_olâ+ª?rqªqefpª`lriaª_bªabqboobaª_vªj^hfkdªobpf * abkqfîªjloqd^dbªab_qpªlkivªibdîivªob`lsbo^_ibªfcªcfk^k`baª_vª^ªcfopqªjloqd^db fpprbaª_vª^ª_^khªpfqbaªfkªqebª`lrkqov)ªf+b+ªfkìrafkdªpr_pfafôfbpª_rqªklqª_o^kè* bpªlcªclobfdkª_^khp+ 35 J^v_bªqebªkbbaªfpªklqªplªjrèªqlªobdri^qbªebadbªcrkap)ª_rqªqlªifjfqªqebªbuqbkq qlªtefèªmbkpflkªcrkapª^kaªifcbªfkpro^k`bª`ljm^kfbpª`^kªfksbpqªfkªqebj+