The financial crisis of 2007 to 2009 has taught the financial world, including regulators, many powerful lessons. The post-crisis period that we are entering offers an opportunity to put those lessons to good use. However, there is a genuine danger of going too far in one direction or the other. It is essential to strike a balance between the private sector's need to operate and innovate without needless regulatory burden, with the need to establish strong prudential regulatory controls.
Among the key areas that will receive increased regulatory focus are: governance, including board-reporting mechanisms; risk identification, including systems integration so that risks can be identified in real time; stress testing; liquidity management; and capital. Of these, much of the focus at the moment is on capital, and in this area, as much as any other, there is tremendous danger if the legislative and regulatory bodies go overboard.
