Establishing Robust Supervision Of Global Finance

By M. Isi Eromosele


Preceding the continuing global financial crisis, risks built dangerously in the world financial system. The world’s largest financial firms became heavily leveraged, increasingly dependent on unstable sources of short-term funding.


Prevalent and pervasive weaknesses in global firms’ risk management systems blurred their vision of aggregate risk exposures on and off their balance sheets. A credit boom was accompanied by a real estate bubble.


In a high degree of complacency, firms did not plan for the potential demands on their liquidity during a financial crisis. As a result, when asset prices began to fall and market liquidity froze; financial firms were forced to pull back on business lending and limited credit for households.


The framework in place for global supervision was not equipped to handle a crisis of such magnitude as occurred when the world financial system imploded in 2008. While most of the largest and highly leveraged financial firms in the world were subject to some level of supervision and regulation, this oversight proved to be woefully inadequate.


The benchmark for capital and liquidity were simply too low. Regulators did not require financial firms to hold sufficient capital that would cover trading assets, high risk loans and off-balance sheet requirements, or to hold increased capital during boom times in preparation for bad times.


On a systemic basis, regulators did not consider the disruption that large, interconnected and high leveraged institutions could wreak on the global financial system and on the world economy if they failed.


The responsibility for supervising the consolidated operations of large global financial firms was divided among various global agencies. This resulted in the fragmentation of supervisory responsibilities and loopholes emerged in the legal definition of what a bank is, enabling owners of banks and other financial institutions to choose the regulators they wanted to work with.


Investment banks were operating with grossly insufficient government oversight. Money market mutual funds were vulnerable to runs. Hedge funds and other private pools of capital operated completely outside of the global supervisory framework.


Proposed Solutions


To create a new foundation for the regulation of global financial institutions, we at Oseme Finance recommend more robust and consistent regulatory standards for all global financial institutions. Similar financial institutions should face the same supervisory and regulatory standards, with no gaps, loopholes or opportunities for arbitrage.


We propose the creation of a super Global Financial Oversight Agency, whose mandate would be to enact regulations that will be strictly enforced and is binding on all countries in the world. This agency will help fill gaps in supervision, facilitate coordination of policy and resolution of disputes and help identify emerging risks in firms and market activities.


There should be a stricter evolution in the current global supervisory authority for Bank Holding Companies to create a single point of accountability for the consolidated supervision of companies that own banks.


All large interconnected financial firms whose demise could threaten the stability of the global financial system should be subject to consolidated supervision. These firms should not be able to escape oversight of their risky activities by manipulating their legal structure.


At Oseme Finance, we recommend that the largest, most interconnected and highly leveraged financial institutions should face stricter prudential regulation than other regulated firms, including higher capital requirements and more robust consolidated supervision.


In effect, our recommendations would force these financial firms to internalize the costs they could impose on society in the case of their failure.


M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance


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