The time is ripe for reform in the worldwide financial system. But the form this change will take is providing a challenge for regulators, according to speakers at the 2009 Annual International Corporate Governance Network (ICGN) Conference in Sydney this week.
The recent regulatory changes in the United States, spearheaded by President Barack Obama, are aimed at protecting the personal finances of Americans and plans include the creation of a new regulator, the Consumer Financial Protection Agency.
Speaking at the ICGN conference, Australian Prudential Regulation Authority executive board member John Trowbridge said he welcomed Obama's proposed new regime.
However, Trowbridge remained concerned the system would give rise to a fragmentation of supervision.
"There could be a situation where the federal government will look after the larger entities, while the smaller entities are left to the states," he said.
US Securities and Exchange Commission (SEC) director Ethiopis Tafara said reform needed to increase systemic risk awareness without suppressing risk-taking activities.
"There needs to be specific prudential regulation for financial intermediaries that are too big to fail," Tafara said.
European Corporate Governance Institute chairman Antonio Borges said regulators needed to find a way for making it possible for banks to fail without the system crumbling.
"If any institution has a permanent guarantee that they won't fail, then this could lead to bad decisions. We have had bank failures in the past and we have known how to deal with them," Borges said.
"However, this really could not happen now, so governments have to find a way to deal with large bank failures."
Trowbridge said new regulation should promote a level of risk taking that also maintained balance.
"Supervision is the key part of working with principles-based regulation," he said.
The regulators also argued new regulation must focus on incentives for those in the financial industry.
"Previously there were misaligned incentives for taking risks. We need fuller disclosure and an extension of the regulatory framework," Tafara said.
"We must also be responsive to the mobility of the markets and capital and we need to ensure that regulation is optimal and comparable across the globe."
Borges said regulators must ensure there were proper reward and sanction arrangements.
All speakers agreed swift change was needed.
Tafara said change needed to happen quickly or momentum could be lost.
"A closer examination of the global financial crisis reveals that there is still fertile ground for further crises. We must clear the rot in which it roosts. Complacency will come at a cost," Tafara said.
Complacency appeared to be a risk in some of the BRIC nations - Brazil, Russia, India and China.
"In Russia there is a resistance to reform. It is possible that regulatory reforms are being put off for revealing true losses," Cartica Capital managing director Mike Lubrano said.
Trowbridge, however, said he was confident the financial industry would fight back from the brink.
"We will have a stronger system, but it will take time," he said.
