Meeting the challenge

“If an event with widespread and severe economic and social consequences keeps on repeating itself, the onus is surely on the authorities to change something.”
from the foreword in The Fundamental Principles of Financial Regulation, International Centre for Monetary and Banking Studies, May 7th, 2009

As an independent “policy incubator” CreditUtility is responding to the lending markets’ cyclical vulnerabilities with this focal point for developing reform proposals. The resulting recommendations are then channeled as public inputs into the authorities’ efforts to manage systemic risk. CreditUtility’s intent is to raise public awareness and enable a transparent, open discussion of how to best revive the credit supply while limiting the probability of any further distress spirals taking hold.

However, easing a de-leveraging trend and reviving a collapsed risk market can be more difficult than a casual observer might first imagine. Many possible responses create moral hazard and further systemic risk challenges. They may also increase complexity and discourage competition. Furthermore, established financial networks and practices incorporate intricate risk management techniques and property rights. Market participants have accepted these in good faith and a range of asset prices rely upon them.

Reform proposals must therefore take these challenges and considerations into account while encouraging broader market participation and market efficiency. Given the volatility of the past few years, reforms might also consider how to introduce regulatory tools capable of both anticipating and responding to the financial network’s instabilities.

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