Reflections on the Crisis and on Its Lessons for Regulatory Reform and for Central Bank Policies

Abstract

This paper surveys the problems exposed by the global financial crisis in the areas of financial regulation and supervision and possible solutions. It also discusses a number of lessons for central bank policy as well as some international dimensions. The discussion is based on the view that suggestions for regulatory reform must be firmly anchored in prior understanding of the consequence of regulatory and supervisory factors that triggered the crisis. Specific issues include the growth of a poorly regulated shadow financial system, shortermism in executive compensation packages and consequent adverse incentive effects, the too big to fail problem, procyclicality in the behavior of financial institutions, conflicts of interest in the rating agencies industry and the tradeoff between transparency in the valuation of assets and broadening the scope of intermediation through securitization.