‘Regulatory reforms needed to avert financial crises’

Ramani KANGARAARACHCHI

Global regulatory reforms are required to prevent future financial crises, Central Bank Assistant Governor P Samarasiri said.

Speaking at the Directors Symposium held on Monday, he said the loss of confidence in all assets markets and the adverse impact on commodities markets were the results of the crisis.

Elaborating on four broad reasons for the crisis he said mispriced and misunderstood risk of innovative financial products was one main reason.

Markets always come up with new products but pricing was misunderstood. Unsustainable funding and business models for banks, excessive build up of debt across the financial system and growth of an unregulated ‘shadow banking ‘system were the other reasons.

“Regulators are very powerful and they get activated after a crisis to prevent future crisis. However, they do not like innovation where as bankers always try to get out of regulators,” he said.

He said there will be some major reforms in the near future which include restoring American Financial Stability Act of 2010 which is a landmark reform. There are four areas in this reform namely, improving accountability and transparency, end to too big to fail, protect tax payers from bailouts and protect consumers from abusive financial services practices.

Separation of banking from securities trading and investment banking, restricting executive remuneration, regulating banks by the Central Bank and stronger consumer protection arrangements will be the other reforms.

In future, banks will have to hold high capital in terms of common equity and the banks will ask for new capital called leverage equity, Samarasiri said.