At the same time, diverging national implementation of globally agreed regulation accelerates regulatory fragmentation, leading to overlapping and incompatible rules and hence significantly increased complexity and risk of regulatory arbitrage in the financial system which is further underscored by a lack of effective cooperation between regulators in different jurisdictions (this was the key theme of last year’s Discussion Paper of the Swiss Finance Council titled ‘International Regulatory Cooperation to counter the Risks of Fragmentation’). Such undue discretion for national regulators can only lead to market fragmentation which ultimately distorts competition and has a noticeable impact on cross-border investment, growth and job creation within the EU Single Market and beyond. We hence welcome that the Financial Stability Board as well as the Japanese G20 Presidency have identified regulatory fragmentation as a key challenge to be addressed.
This year’s Swiss Finance Council Discussion Paper examines the extent to which the financial system has stabilised through new regulatory frameworks and, at the same time, asks what evolving risks are likely to gain prominence over time. Among evolving risks, we have identified three key areas which we explore in the form of case studies:
(i) the cumulative risks from complex and multi-level regulation; (ii) cybersecurity and operational resilience overall; (iii) and the risks associated with climate change. While there is a strong dialogue between the financial sector and the regulatory community concerning these risks, we feel that their increased prominence over the last few years necessitates a new engagement model. These risks could threaten global systemic financial stability if they are not adequately addressed by both the public as well as the private sector. Concrete and joint action towards a more robust system as well as designing and implementing procedures for use in potential future crises is now key.
We strongly believe in an open dialogue between policymakers and the financial sector. Establishing principle-based global regulatory coordination should be at the core of policy objectives. And we will need to keep in mind the global dimension of financial markets, in particular of the evolving risks we identified, seeking regulatory alignment with the EU’s main trading partners and significant financial centres.
Drawing on the Discussion Paper’s case studies, as well as on our analysis of the global regulatory reforms accomplished to date, we propose three sets of recommendations that could serve as building blocks for both regulators and the financial industry to address and manage evolving risks in a way that maintains global systemic stability:
(i) achieve completion of prudential reforms, assess their impact and develop a forward-looking approach for the future; (ii) deliver financial stability in an efficient manner; and (iii) move to a new engagement model to prepare for evolving risks. We trust that you will find the publication a thought-provoking contribution to this important debate.
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