During the current global financial crisis, failures have surfaced in macroeconomic policies and the regulation and supervision of banks and non-banking institutions. It is now clear that agencies involved in regulation, supervision, and crisis management did not always have clear mandates and tools commensurate with these mandates, and that there was a lack of international consistency and coherence of policies. The global financial crisis has also led to a reconsideration of the benefits and costs of open financial markets, leading to calls for a reassessment of the global financial architecture.
This paper draws lessons from the recent financial crisis for reforming financial systems, including lessons for macroeconomic policy, financial regulation, and the global financial architecture. To properly diagnosis the problem, the paper starts with a review of the causes of the current global financial crisis, drawing on historical perspectives and discussing especially its international dimensions. It highlights the multiple causes of the crisis, with a mixture of many elements common to other financial crises and some new elements. It reviews the many channels and mechanisms through which the financial crisis propagated and spread globally. And it shows how the ongoing global crisis is leaving a considerable legacy of government interventions and macroeconomic consequences, especially in advanced countries, which will condition future actions and reforms.
The paper then identifies principles and policy actions for redesigning prudential regulation and financial architecture in light of the current and past financial crises, with special emphasis on international dimensions. The financial crisis has brought to light many weak elements in national financial architectures, particularly regarding the treatment of systemic banks and other financial institutions; the assessments of risks and vulnerabilities; and the resolution frameworks for financial institutions and claims.
The global nature of the financial crisis has furthermore made clear that financially integrated markets have benefits, but also risks, with large real economic consequences. The crisis highlights that the international financial architecture is still far from institutionally matching the closely integrated financial systems. Surveillance, information sharing, crisis management, and liquidity support are all areas in which much progress is needed. The paper summarizes current thinking on what reforms can best address these issues.
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Lessons and Policy Implications We Have Learnt From the Global Financial Crisis
