Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest considerations; and information asymmetry, which justifies curbs on freedom of contract in selected areas of financial services, particularly those that involve retail clients and/or Principal–agent problems. An integral part of financial regulation is the supervision of designated financial firms and markets by specialized authorities such as securities commissions and bank supervisors.
In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. It is also sometimes erroneously referred to as "systematic risk".
Roger W. Ferguson Jr. is an American economist, attorney and corporate executive who served as the 17th vice chairman of the Federal Reserve from 1999 to 2006. Prior to his term as vice chairman, Ferguson served as a member of the Federal Reserve Board of Governors, taking office in 1997. He was the first African-American vice chairman. After leaving the Fed, he served as president and CEO of the Teachers Insurance and Annuity Association of America (TIAA) from 2008 to 2021. Ferguson has also been appointed to the board of directors of several companies including Alphabet.
Banking regulation and supervision refers to a form of financial regulation which subjects banks to certain requirements, restrictions and guidelines, enforced by a financial regulatory authority generally referred to as banking supervisor, with semantic variations across jurisdictions. By and large, banking regulation and supervision aims at ensuring that banks are safe and sound and at fostering market transparency between banks and the individuals and corporations with whom they conduct business.
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III.
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 and then again in 2014. As of 2019, the BCBS has 45 members from 28 jurisdictions, consisting of central banks and authorities with responsibility of banking regulation.
The Financial Action Task Force (on Money Laundering) ('FATF, aka "Faftee"), also known by its French name, Groupe d'action financière (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering and to maintain certain interest. In 2001, its mandate was expanded to include terrorism financing.
PROGRES is a research programme set up by the Geneva Association, also known as the International Association for the Study of Insurance Economics. It focuses on questions related to regulation, supervision and international co-operation of insurance and financial services as well as other legal issues of importance. The research programme manages The Geneva Association's co-operation with the supervisory authorities around the world and in particular with the International Association of Insurance Supervisors. The objectives of PROGRES are:
The European Insurance and Occupational Pensions Authority (EIOPA) is a European Union financial regulatory agency. It was established in 2011 under EU Regulation 1094/2010.
The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. It was established in the 2009 G20 Pittsburgh Summit as a successor to the Financial Stability Forum (FSF). The Board includes all G20 major economies, FSF members, and the European Commission. Hosted and funded by the Bank for International Settlements, the board is based in Basel, Switzerland, and is established as a not-for-profit association under Swiss law.
Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole. After the 2007–2008 financial crisis, there has been a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.
Basel III is the third Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing minimum capital requirements, holdings of high quality liquid assets, and decreasing bank leverage.
The European System of Financial Supervision (ESFS) is the framework for financial supervision in the European Union that has been in operation since 2011. The system consists of the European Supervisory Authorities (ESAs), the European Systemic Risk Board, the Joint Committee of the European Supervisory Authorities, and the national supervisory authorities of EU member states. It was proposed by the European Commission in 2009 in response to the financial crisis of 2007–08.
A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as "too big to fail".
The International Association of Deposit Insurers (IADI) was formed on 6 May 2002 with the purpose of sharing deposit insurance expertise with the world and contributing to the stability of financial systems as the standard setter for deposit insurance with a global and expanding membership.
At the heart of the prudential Solvency II directive, the own risk and solvency assessment (ORSA) is defined as a set of processes constituting a tool for decision-making and strategic analysis. It aims to assess, in a continuous and prospective way, the overall solvency needs related to the specific risk profile of the insurance company. Risk Management and own risk and solvency assessment is a similar regulation that has been enacted in the US by the NAIC. Other jurisdictions are enacting similar regulations to comply with the Insurance Core Principle 16 enacted by the IAIS.
European Banking Supervision, also known as the Single Supervisory Mechanism (SSM), is the policy framework for the prudential supervision of banks in the euro area. It is centered on the European Central Bank (ECB), whose supervisory arm is referred to as ECB Banking Supervision. EU member states outside of the euro area can also participate on a voluntary basis, as was the case of Bulgaria as of late 2023. European Banking Supervision was established by Regulation 1024/2013 of the Council, also known as the SSM Regulation, which also created its central decision-making body, the ECB Supervisory Board.
The Vienna initiative was a plan undertaken in January 2009 by European banks and governments during the height of the financial crisis to control the situation and work towards a joint solution specifically in developing regions of Europe. It has been created to avoid a bank crash that was threatening the region because of the subprime crisis as the liquidity in the CESEE countries depended on the Western ones. It is a forum where the representatives of the private and public economical sector from the Western countries but also Central, Eastern and South-Eastern European countries (CESEE) meet. This Initiative impacted much of those countries, notably Romania.
A financial regulatory authority or financial supervisory authority is a public authority whose role is to ensure the proper implementation of financial regulation within its scope of responsibility.
