A critical analysis of the regulation of systemically important financial institutions

Abstract

The recent crisis has been marred by various regulatory flaws together with a lack of market discipline. It has been argued that the lack of regulatory requirements to effectively monitor and mitigate systemic risk had a major impact on the outcome of the crisis. Furthermore, the focus was also on market participants who were creating various financial instruments, which in themselves were risky and were not regulated. Regulation has been extensively enhanced to cater for the regulatory gaps present during the crisis. In view of such regulatory improvements, supervisors have now been provided with better and more extensive tools to monitor and mitigate systemic risk. In this regard, the pressure is now on supervisors to step up their game as they cannot afford another failure. This study examines whether this shift is actually occurring and how the right balance should be achieved to be able allow supervisors to carry out their work effectively and efficiently. Data was collected from multiple sources mainly from academic articles, official documents and interviews. This study has shown that the regulatory response to the crisis has indeed provided supervisors with much more tools to monitor the buildup of systemic risk. However, the effectiveness of such tools still remains to be seen as most of the requirements will be phased in gradually and thus still need to be tried and tested.