Crash of 2008

Reform

A crippling of the world financial system that was triggered by a minority of defaults in a small corner of the United States economy has been seen as an reminder of that system's inherent instability. The debate about measures to reduce that instability may be prolonged, but some proposals have already been put forward. In April 2008 the international Financial Stability Forum attributed the crisis to shortcomings in underwriting, firms' risk management practices, investor diligence, credit agencies' performance, staff incentives, disclosure practices, feedbacks between valuation and risk-taking, and regulatory effectiveness. They recommended regulatory changes under the headings of: strengthened prudential oversight of capital, liquidity and risk management, enhanced transparency and valuation, changes in the roles and uses of credit ratings, strengthening of the authorities’ responsiveness to risks, and robust arrangements for dealing with stress in the financial system. Another international study group has recommended measures to improve the performance of the credit rating agencies , but has also recommended that investors should not treat credit ratings as a substitute for conducting their own risk assessments. Charles Goodhart has proposed that bank capital requirements should be what he terms "contra-cyclical", meaning that they should be raised in times of boom and relaxed in downturns; and also related to the volume of lending , and William White has suggested that monetary policy should be directed to the objective of countering all economic imbalances </ref name=White>. Proposals for reform by Raghuram Rajan, Dani Rodrik, Willem Buiter and others, put forward in advance of the November meeting of the G20 world leaders, have been published as an ebook . The proposals of the G20 leaders are set out in the article on the G20 summit.

(recommendations for the improvement of financial risk-assessment are discussed on the Tutorials subpage, and an account of further proposals for the reform of the financial system is to appear in the article on the financial system)