Regulatory Response to 2008 Financial Crisis

The Economist provides a good overview of The Origins of the Financial Crisis in one of their crash courses (which appear to be accessible without a subscription)

One of the reforms instituted in the wake of the financial crisis is the establishment of the Financial Stability Board (FSB, unfortunately the same acronym as Russia's intelligence service). The board is intended to coordinate the activities of national central banks & finance authorities (such as the US Federal Reserve, Securities and Exchange Commission and Department of Treasury) and international organizations (such as the European Central Bank, European Commission, IMF, World Bank). [List of FSB members]

The mandate of the Financial Stability Board is to:

• assess vulnerabilities affecting the financial system and identify and oversee action needed to address them;
• promote co-ordination and information exchange among authorities responsible for financial stability;
• monitor and advise on market developments and their implications for regulatory policy;
• advise on and monitor best practice in meeting regulatory standards;
• undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps;
• set guidelines for and support the establishment of supervisory colleges;
• manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and
• collaborate with the IMF to conduct Early Warning Exercises.

Another major reform was the Basel III set of regulations produced by the  Basel Committee on Banking Supervision at the Bank for International settlements. These regulations, which are recommendations for national level authorities, provide guidance on acceptable levels of risk in capital markets and the amount of reserves banks need to keep on hand to meet obligations and cover bad debts. They are highly technical and focus a lot on the role of Central Counterparty (CCP) clearing. [FTSE has a short video that explains Basel III if you are interested in the details.] Of course, it is up to each nation to implement the rules for itself and the Federal Reserve has done so in the US

An IMF Survey report, "Safer Global Financial System Still Under Construction, Says IMF" notes that the organization feels there is still more work to be done in the following areas:

•  the need for a global-level discussion on the pros and cons for direct restrictions on certain business activities for banks, rather than just requiring them to hold more capital for these activities;

• monitoring, and a set of prudential standards if needed, for nonbank financial institutions posing systemic risks within the so-called shadow banking sector;

• careful thought on how to encourage the use of simpler products and simpler organizational structures;

• further progress on sorting out large institutions that get into financial trouble, including cross-border resolution to help secure the benefits of financial globalization.

In a Finance and Development article, "Fixing the System",  Laura Kodres and Aditya Narain note that regulators have focused attention on the central causes of the crisis, especially the shadow banking system, and have essentially picked the low hanging fruit of regulatory reform. This leaves them with the following more difficult tasks:

• identifying and building tools—still in the early stages of development—to mitigate systemic risk;
• improving the ability of the authorities to deal with the aftermath if the tools designed to prevent systemic events fail; and
• providing a framework for financial intermediation (the transfer of savings to investments) to assist in strong and stable economic growth, without overly prescriptive regulation.