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Designing Global Financial Regulatory Instruments

By Viral Acharya, C.V. Starr Professor of Economics

Viral Acharya on flight from US treasuries

The point is to regulate any intermediary—whether it is viewed as systemic or not in different countries— that holds systemic instruments.

Despite the largest financial crisis since the 1930s, progress towards international coordination of financial regulation remains dismally slow.

To speed the development of a harmonized regulatory framework, policymakers need to focus on international rules for financial instruments, rather than just financial institutions.

To date, most regulation addresses the risks of individual institutions, rather than collective or systemic risks. Where broader issues have gained attention, it has focused on large, complex financial institutions that are deemed systemically important from a domestic perspective.

Yet, these systemically important financial institutions (SIFIs) operate across borders. And differences in regulatory styles and interests across countries slow international coordination.

Worse, the focus on SIFIs likely will shift risk-taking over time to the weakly regulated or unregulated shadow banks.

How can the regulation of financial instruments address these problems?

Read full article as published in Mint.