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By Jacques de Larosière
Published: October 25 2010 22:38 | Last updated: October 26 2010 15:32
Politicians are determined to strengthen the financial system in order to avoid a repeat of the current crisis, which has resulted in such enormous costs in terms of growth, employment and public budgets. They can only be satisfied by a steep increase in capital requirements, most obviously as proposed by the Basel Committee on Banking Supervision. The Basel recommendations would at least quintuple the amount of core capital to be held by banks, requirements that will no doubt be increased again in the coming weeks.
But such "re-regulation" can have unintended consequences. It could encourage a transfer of heavily taxed operations in terms of capital requirements, such as trading, to the so-called shadow banking system, outside the scope of regulation and supervision. Such shifts may endanger financial stability unless current re-regulation is accompanied by new regulatory and supervisory structures for "non-banks". Efforts in this respect are under way but they are still at the project stage, and will take time.
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