Navigating the path of financial sector reform

At the World Economic Forum Annual Meeting 2012, Swiss Re participated in a series of private sessions for leaders of the financial services industry.

The WEF’s Financial Services Industry Partnership Private Sessions were co-chaired by Stefan Lippe, Swiss Re CEO until 31 January 2012, and Standard Chartered CEO, Peter Sands. The sessions were an opportunity to discuss the current financial sector reforms, which place a particular emphasis on financial stability issues and being are introduced in a very volatile and uncertain macro-economic environment. There are some of the issues that Swiss Re brought to the table.

Financial innovation

Though generally very positive through its support of society and economic development, financial innovation sometimes has unintended consequences, such as the issues with subprime mortgage-backed securities. To address this, the WEF launched the project, “Rethinking Financial Innovation,” in 2011, with Mr Lippe as Steering Committee Chair.

Mr Lippe has been guiding the project to address this issue at the institutional, industry and supervisory levels. Successful financial innovations are generated within robust risk management frameworks. So, a key aim of the project is to, if possible, improve existing risk management techniques within institutions to increase the occurrence of innovations which have intended, positive outcomes.

A second aim is to promote within the industry a better understanding of how industry associations can foster and promote financial innovation, so it more fully serves societal and economic needs. A final project goal is to provide guidance to industry and systemic supervisors about how they can guide and support the various financial industries to create an environment under which financial innovation can flourish in a way that is beneficial to economic development and progress. The final output of the project will be a report, scheduled to be published in the first half of this year.

Effective regulation

A series of Financial Services Governors meetings, co-chaired by Stefan Lippe, were an opportunity for Swiss Re to present its views on regulatory reform. The financial services industry is facing a challenge: new reforms are being introduced, with a particular emphasis on financial stability issues, in a very volatile and uncertain macro-economic environment.

As regulators and policymakers are developing new requirements to reform the whole financial services industry, the cross-sectoral impact of new regulation must be considered. A great deal is at stake if policymakers fail to understand how insurance, banking and securities markets differ and how they will interact under the new regulatory regimes. This means understanding both the cumulative impact of regulations introduced to banks and insurers, as well as the potential spill-over effects this new regulation may cause. These issues were outlined in an important 2011 paper by the IIF, which was presented by Swiss Re Chairman Walter B. Kielholz, IIF board member and Chairman of the authoring IIF Insurance Working Group.

Regulators and policymakers need to carefully consider the specificity and experience of each sector – this plays a key role in the debate on financial security and systemic risk regulation.The current approach of policymakers and international organisations remains very much driven by banking considerations. Despite many supervisors concluding that insurance is unlikely to be a source of systemic risk, there remains political pressure for insurance regulators to designate some insurers as SIFIs and to introduce measures which have not been tested in insurance. More information can be found in Mr Kielholz’s recent article for the Global Risk Regulator.

The speed of reform in insurance is accelerating. To avoid negative consequences and market distortions, proper impact assessments and international coordination is required.

It is crucial to ensure that proposed regulations do not hamper the ability of banks to support growth and insurers to provide long-term financing and risk capacity to the real economy; as economic growth clearly requires a financial system that is able to fund the expansion of economic activity. Such developments could undermine the ability of insurers and banks to undertake their core functions in supporting economic activity and recovery, as well as reduce the likelihood of a more stable financial system.

Published 1 February 2012

Image: Davos Congress Centre, WEF/flickr CC-BY-SA 2.0

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