Table of Contents
Overview of the Financial System
The financial industry is witnessing some challenges with the global economic outlook deteriorating, the European sovereign debt crisis intensifying, and investor confidence decreasing in the ability of policy-makers to respond. These changes in the global economic environment present both significant challenges and opportunities. Following the inception of the prevailing financial tragedy, global financial stability is still not assured and significant policy challenges stay put. Balance sheet restructuring is defective and financial leverage is still very high. The global financial crisis can be attributed to the following: the deterioration in the global economic outlook, the intensification of the European sovereign debt crisis and growing questioning of the ability of policy-makers to respond . In recent times, a series of shocks have recently buffeted the global financial system: fresh market turbulence emanating from the euro area periphery, the credit downgrade of the United States and signs of an economic slowdown . Regulation and Policies
At the global level, regulatory reforms are still needed to put the financial sector on a sounder footing. The G-20 is undertaking a radical and comprehensive program to strengthen the regulation, supervision and infrastructure of the global financial system. The fundamental objective of the G-20 measures is a resilient, global financial system that efficiently supports global growth. Its goals are to build a financial system where financial institutions and markets play critical and complementary roles to support long-term economic prosperity, which requires institutions that are adequately capitalized, with sufficient liquidity buffers to manage shocks. Authorities are increasingly hearing concerns about the pitch of the playing field for Basel III implementation. The G-20’s comprehensive reform program seeks to boost confidence in global financial institutions and markets by providing a path to a more resilient system and an end to government support. It is critical to remember that the Basel rules have always been, and continue to be an international minimum standard, rather than a “one-size-fits-all” approach . Some countries will implement Basel III faster than others. Various countries have welcomed the current transition period to 2019 for Basel III. It reflects a lowest-common-denominator compromise that gives the time needed to rebuild capital buffers in those crisis economies that are furthest from compliance. Some countries may decide it is not in their best interests to take full advantage of this flexibility. Certainly, how quickly the new rules are adopted is bound to be a function of both the current health of the financial system and the macro financial environment in each jurisdiction. In Canada, banks are expected to be fully compliant with Basel III by early in the transition period, which starts in January 2013. This reflects the strong starting positions of Canadian banks and the benefits of building capital in the face of currently buoyant credit expansion. Some countries are likely to adopt tougher rules. For example, countries such as Sweden, Switzerland and the United Kingdom, with very large banking sectors relative to their domestic economies, have signalled their preference for higher loss-absorbency capacity. In these jurisdictions, since the failure of a major bank would have disproportionately large consequences, additional caution is sought-after. Addressing the Global Financial Crisis
The priorities in advanced economies are to address the legacy of the crisis and conclude financial regulatory reforms as soon as possible in order to improve the resilience of the system. However, it is paramount to ensure swift implementation of the agreed steps and to consider further enhancements in the economic and financial governance...