Financial regulatory reforms are needed to strengthen the financial system and prevent future crises. Recent reforms include the Basel III framework, which has strengthened standards and requirements for capital and liquidity. These standards have increased the capital a bank must have and also expanded the definition of capital to include loss-absorbing instruments. They also have created new requirements for risk management and liquidity management. One example of the latter is the Liquidity Coverage Ratio, which requires banks to maintain enough liquid assets to meet hypothetical funding stress for 30 days.
Financial regulatory reforms aim to increase transparency and improve capital requirements by requiring higher-quality capital. They will also introduce countercyclical buffers and increase disclosure. Oversight of credit rating agencies will also be improved. In addition, accounting standards will be unified between the US and Europe. The proposed reforms also aim to encourage banks to raise more common equity capital.
Financial regulatory reforms have impacted virtually every aspect of the financial system in the U.S. and Western Europe. This article reviews the major reforms and explains how they fit together. It also assesses the scholarly literature on these reforms and highlights six important open questions for researchers. These questions include:
Implementing financial regulatory reforms has been a difficult task. The number of rules is large and complex, and implementing them has required a great deal of coordination. As a result, implementation of the reforms has been slow. This has meant that many rules have not been finalized yet, and some provisions have been delayed.
The current economic outlook in Europe has implications for the international financial system. One challenge is how to phase in the new capital rules. No country is in the same position, and different firms have different capital requirements. For instance, some European banks are lower capital-capitalised than their US counterparts, while others are more leveraged. Another issue is the pace of capital raising.
Despite the progress made since the Dodd-Frank Act, implementation of financial regulatory reforms remains uneven. Several key reforms have yet to be implemented, and the effectiveness of some measures remains to be determined. While the Financial Stability Oversight Council (FSOC) has taken steps to address the systemic risks, there is still a need for improvement.
The Dodd-Frank Act set forth a wide range of financial reforms to prevent a repeat of the 2007-2008 financial collapse. It also included a series of additional consumer protections. While the Trump administration reversed some of these changes, the Biden administration is working to strengthen previous changes.
The CCAR process includes two main parts: quantitative assessment of the firm’s capital buffer and qualitative assessment of risk management and capital planning processes. This framework has led to improved capital buffers at some of the largest financial institutions. Furthermore, it has forced many firms to improve their risk management and capital planning processes.