You’ve got to fight! For your right! … to fair banking

From The UK Conversation.

British governments have been trying to improve financial inclusion for the best part of 20 years. The goal is to make it easier for people on lower incomes to get banking services, but this simple-sounding target brings with it a host of problems.

A House of Lords committee will shortly publish the latest report on this issue, but the genesis of financial inclusion policy can be traced back to the late 1990s as part of the Labour government’s social exclusion agenda. The scope and reach of this strategy has since expanded beyond a focus on access to products and now seeks to improve people’s financial literacy to help them make their own responsible decisions around financial services.

The goal of increasing the availability of basic banking has become a tool for tackling poverty and deprivation worldwide, among governments in the global north and global south and among key institutions. In 2014, the World Bank produced what it described as the world’s most comprehensive financial exclusion database based on interviews with 150,000 people in more than 140 countries.

Retaliation? mobiledisco/Flickr, CC BY-NC-ND

Muddy waters

However, broad and enthusiastic acceptance of such policy efforts has prompted doubts about the simplistic narrative of inclusion and exclusion. This way of thinking does not capture the complexities of the links between the use of financial services and poverty, life chances and socio-economic mobility. It also ignores the sliding scale of financial inclusion, from the marginally included – who rely on basic bank accounts – through to the super-included with access to a full array of affordable financial services.

You can see the complexity and contradictions clearly in innovations such as subprime products and high-cost payday lenders. They have made it increasingly difficult to draw a clear distinction between the included and the excluded. Mis-selling scandals and concerns over high charges have also shown us that financial inclusion is no guarantee of protection from exploitative practices.

Even the pursuit of better financial education offers a mixed picture. Critics have raised concerns that this shifts the focus away from structural discrimination and towards the individual failings of “irresponsible and irrational” consumers. There is a grave risk that we will fail to tackle the root causes of financial exclusion, around insecure income and work, if policy follows this route.

In the midst of this focus on customers, the government’s role has been reduced to supporting those education programmes and cajoling mainstream banks, building societies and insurers into being more inclusive.

Vested interests. The Square Mile in London. Michael Garnett/Flickr, CC BY-NC

Given the central role that financial services play in shaping everyday lives, a hands-off approach from the state is inadequate. It fails to address the injustices produced by a grossly inequitable financial system. Our recent research examined how the idea of financial citizenship might offer a route to improvements. In particular, we looked at the idea of basic financial citizenship rights and the role that might be played by UK credit unions, the organisations which, supported by government, seek to bring financial services to those on low incomes.

The idea of establishing rights was put forward by geographers Andrew Leyshon and Nigel Thrift in response to the growing lack of access to mainstream financial services. The goal would be to recognise the significance of the financial system to everyday life and set in stone the right and ability of people to participate fully in the economy.

That sounds like a laudable aspiration, but what could a politics of financial citizenship entail in practice?

Drawing on the work of political economist Craig Berry and researcher Chris Arthur, we argue that the policy debate should move on to establish a set of universal financial rights, to which the citizens of a highly financialised society such as the UK are entitled regardless of their personal or economic situation.

  1. The right to participate fully in political decision-making regarding the role and regulation of the financial system. This would entail, for example, the democratisation of money supply and of the work of regulators. Ordinary people would have to be able to meaningfully engage in debates about the social usefulness of the financial system.
  2. The right to a critical financial citizenship education. Financial education needs to go beyond the simple provision of knowledge and skills to understand how the financial system is currently configured. It should provide citizens with the tools to be able to think critically about money and debt, as well as the capability to effect meaningful change of the financial system.
  3. The right to essential financial services that are appropriate and affordable such as a transactional bank account, savings and insurance.
  4. The right to a comprehensive state safety net of financial welfare provision. This could include a real living wage to prevent a reliance on debt to meet basic needs and could go all the way through to the provision of guarantees on the returns that can be expected from private pension schemes.

Establishing this set of rights would be a major step towards enhancing the financial security and life chances of households and communities. The weight of responsibility would shift from individuals and back on to financial institutions, regulators, government and employers to provide basic financial needs. As one example, just as people in the UK are given a national insurance number when they turn 16, so the government and the banks could automatically provide a basic bank account to everyone at the age of 18.

The UK credit union movement does make efforts towards these goals, but it cannot fully mobilise financial citizenship rights largely due to its limited scale and regulatory and operational limitations. For the rights to work, they will need the support of the state, of financial institutions, regulators and employers. That would enable the country to build something less flimsy than the loose structure we have right now, which piles blame onto the consumer and relies on voluntary industry measures to pick up the slack.

AMP Bank Lifts Mortgage Rates

AMP Bank has announced changes to its mortgage lending rates for both owner occupiers and investors.

Effective 3 April 2017, variable interest rates for interest-only loans for existing customers will increase by 15 basis points for owner-occupied loans and 28 basis points for investment loans.

In addition, effective 31 March 2017 for new customers and 3 April 2017 for existing customers, owner occupied principal and interest variable rate loans will increase by 7 basis points. As a result, the AMP Bank Professional Pack owner occupied variable rate loan will increase to 3.92% p.a. for new customers for loans of $750,000 and above.

AMP Bank is encouraging customers with interest-only loans to switch to principal and interest repayments where appropriate. Until 30 June 2017, AMP Bank will waive the switch fee for customers moving to principal and interest repayments.

Sally Bruce, Group Executive AMP Bank commented: “We are managing our portfolio in a very active market but are committed to providing competitive rates to our customers to help them achieve their property goals.

“We also want to encourage customers to move to principal and interest repayments where it’s appropriate, as there is a great opportunity to access lower interest rates and repay your loan faster.

“Our decisions on rates are not taken lightly and reflect wholesale funding costs, the need to maintain a balanced portfolio and the market environment,” she said.

Mortgage fraud increasing year on year

From Australian Broker.

The number of cases of mortgage fraud has been on the rise, with brokers warned to look out for falsified documents supplied by clients seeking unsuitable loans.

 

“Unfortunately, fraud continues to increase year on year,” said Paul Palmer, Connective’s compliance support manager, at the aggregator’s professional development day in Sydney on Thursday (23 March).

“The technological advancements of digital applications enable people to create documents or change existing documents to be more and more authentic looking.”

The aggregator has seen statements that lenders could only identify as fraudulent because they had no record of issuing them, Palmer said.

“Obviously, you can’t expect brokers to pick that up. Fortunately for us, most people trying to commit fraud aren’t that good. They always make spelling mistakes, a typo, or they get their mathematics wrong.”

As fraud investigations are inherently unpleasant for both broker and aggregator, Palmer urged a proactive rather than reactive approach.

To do this, he suggested brokers undertake all due diligence, meet required responsible lending obligations, cross check & verify all documents provided by the customer, and look for inconsistencies.

“We see a lot of differences in fonts, in key financial data, and also, as I said, a lot of mathematical areas. Run their payslips through the pay calculator and you’ll be amazed at how often that finds something.

“One of the biggest ones I found over the past 12 months is where there were two payslips and they forgot to change the accrued annual leave entitled from payslip to payslip; which we would expect to change. It’s a very common mistake.”

If it is impossible to meet the customer face-to-face, Palmer encouraged brokers to mitigate any risks by becoming familiar with conditions that lenders set up to accept remote broker-client meetups.

“From our perspective, a good thing is to get certified ID. Through Skype or Facetime conversations, get a snapshot of their ID. It fulfils an obligation to show you actually know who you’re dealing with.”

Finally, Palmer warned brokers to put themselves in the right mindset when it comes to fraud.

“Don’t think that you can’t get caught,” he said. “Unfortunately, there’s been a significant increase in the amount of referrals looking to give loans to mortgage brokers. In particular new-to-industry brokers have been targeted by people who have clients that can only service or get a loan through submitting fraudulent documentation.”

He urged brokers to do due diligence on their referrers as well.

“Make sure you’re comfortable with them as people, make sure they’re people you do your own business with yourself, and don’t trust anything they give you more than anything provided by your clients. In some ways, you need to be more skeptical.”

St George Lifts Mortgage Rates

St George has followed the other majors with lifts in variable mortgage rates, and those with investment loans are hit the hardest. They are also offering a “free” switch from interest only to principal and interest repayments until June.

Effective on 8 May 2017, St George will be increasing the following variable rates for:

  • Owner Occupier Interest Only Home Loan variable rates: by 0.08% to 5.50% per annum (comparison rate 5.67% per annum*)
  • Residential Investment Principal & Interest Home Loan variable rates: by 0.23% to 5.78% per annum (comparison rate 5.95% per annum*)
  • Residential Investment Interest Only Home Loan variable rates: by 0.31% to 5.98% per annum (comparison rate 6.15% per annum*)

*Comparison rates are based on a loan of $150,000 over a term of 25 years.

Bank Risk-taking Behaviour Rises As Monetary Policy Eases

A newly released IMF working paper ” Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?” looks at how banks behave in an easing monetary policy environment. They found that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. Results are non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.

We think think this means that in a low interest rate environment, counter-cyclical buffers should be increased.  In Australia, in the current low rate environment, policy settings are still too generous.

While decisive and persistent monetary policy accommodation was necessary to support aggregate demand in advanced economies during and after the financial crisis, there is lingering concern about the side effects of low interest rates and central bank balance sheet expansion on risk-taking behavior in the financial sector. In this paper, we investigate the extent to which financial vulnerabilities build up at the firm level during extended periods of monetary policy easing at home and in the U.S.

Based on a data for roughly 1,000 bank and nonbank financial institutions—including insurance companies, investment banks and asset managers—in 22 countries over the past 15 years, we find significant evidence of increased risk-taking behavior. Domestic banks and nonbanks alike increase their leverage ratios in response to persistent monetary policy accommodation at home. In addition, prolonged Federal Reserve policy easing leads banks and nonbanks outside the U.S. to take on more risks, with an effect similar to equivalent domestic monetary policies.
These results are robust to alternative measures of financial vulnerability, controls, and specifications. Importantly, the relationship between persistent monetary policy easing and financial firm vulnerability appears to be non-linear, with risk-taking behavior rising most quickly at the onset of policy easing.

Our findings ideally will spur research in two directions. First, further work is needed to develop benchmarks for risk-taking behavior. While we document an increase in risks taken by financial institutions, we are unable to take a position on whether such increases in risk are worrisome or excessive. Some degree of change in risk-taking is an inherent part of the monetary policy transmission mechanisms. To some extent, if prudential policies and regulations inhibit financial institutions from taking more risk in response to monetary policy easing, the expansionary effect of monetary policy on the real economy may be diminished.

Second, our results should inform the ongoing debate on using monetary policy tightening for financial stability purposes (see IMF, 2015, for instance). Costs of doing so would arise from lower employment and output in the short to medium run, feeding back to higher defaults and funding costs, thus reducing financial stability. But benefits need further exploration. The emphasis so far has been on the link between policy rates and credit growth, and in turn between credit growth and financial stability (Svensson, 2015). However, this paper suggests that the link could also go through the leverage of financial sector firms.

But even without further work, our results have several policy implications. Countries should closely monitor financial sector risks during periods of monetary policy accommodation at home, and in the U.S. They should develop solid prudential and regulatory frameworks, so as to preserve room for monetary policy to manoeuver to achieve its inflation and output objectives. Such frameworks should apply to both banks and nonbanks.

Note: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Referrers being paid ‘almost as much’ as brokers

From The Advisor.

There has been a sharp increase in the use of mortgage referrers, such as real estate agents and developers, whom are being paid “almost as much” as mortgage brokers in commissions “despite doing much less”, according to the financial services regulator.

ASIC’s Review of mortgage broker remuneration, which was released for consultation last week, included 13 findings about mortgage distribution and the home loan market.

Notably, the regulator highlighted that those who merely refer consumers to lenders are paid “almost as much as brokers”, despite “doing much less”.

The regulator described mortgage referrers as individuals or businesses that provide a referral service to lenders or brokers.

“Some of the most common referrers are real estate agents, financial planners, accountants and lawyers. However, referrers may also include other types of individuals and organisations, including property developers and non-profit organisations,” ASIC said.

The number of referrals being made to lenders, either by the referrer directly or through a referrer aggregator has increased significantly.

According to ASIC, the total number of home loans sold after a referral increased from 8,124 in 2012 to 26,106 in 2015, representing an increase in value from $3.3 billion to $14.6 billion (22.6 per cent).

ASIC noted that more than 87 per cent of those sales were by two major banks.

Referrals by professional services businesses (either directly or through a referrer aggregator) made up the bulk of referrals, with one out of three of these referrals coming through a referrer aggregator.

“We found that referrers are paid almost as much as brokers. Like brokers, they receive an upfront commission when a loan application is successful.”

ASIC found that on average, lenders paid 0.46 per cent of the loan amount as an upfront commission, although for some groups of referrers this was as much as 0.56 per cent.

“This level of commission-based remuneration is paid even though referrers play a very limited role,” the regulator said.

“The referrers we reviewed all operated under a licensing exemption. Under this exemption, they are permitted to merely refer a consumer to a lender, and in doing so they are required to disclose what remuneration they may receive. They cannot provide advice to consumers, or assist them in applying for a home loan. Referrers are also not subject to the responsible lending conduct obligations in the National Credit Act.”

ASIC asked lenders and aggregators whether they sought to restrict brokers from passing on some of their commission to referrers. No lenders reported that they sought to impose such restrictions.

“Around one-third of aggregators reported that the referral agreement with the broker did include limitations,” according to ASIC.

“However, based on aggregators’ additional comments, these provisions did not appear to prohibit a broker from making such payments; rather, they appeared to require the broker to comply with the relevant legislative provisions.”

… And Bendigo Bank

At its regular fortnightly pricing committee meeting, Bendigo Bank decided to increase its residential investment variable interest rate by 0.25% p.a. to 6.01% p.a. Standard residential variable mortgage rates for owner-occupiers remain unchanged at 5.48% p.a. The change is effective as of 31 March 2017 for new and existing loans. A further decision was made to adjust the LVR cap on residential investor loans to 80% effective 27 March 2017.

Bendigo and Adelaide Bank managing director Mike Hirst said the adjustment reflects the requirement to meet regulators expectations in dampening demand for investor lending. Additionally, this change also reflects the bank’s view that recent ultra-competitive mortgage pricing needs to return to levels that better reflect the current market funding and capital costs.

“As has been well telegraphed to all Australian authorised deposit taking institutions, there is an expectation that as lenders, we must manage within the regulator’s 10 per cent growth speed limit for investor loans.

“When setting these rates we’ve tried to carefully balance the interests of our mortgage customers, those who earn money through deposits and those who invest in our Bank,” Hirst concluded.

Footnote: Customers on a residential investment variable interest rate with a $250,000 loan will see their repayments increase by $39.96 a month (principal and interest home loan over 30 years).

… And CBA Makes 4

Commonwealth Bank has today announced an increase in its Variable Home Loan interest rates and Viridian Line of Credit products effective Monday 8 May 2017.

– The standard variable rate for owner-occupier home loan customers paying principal and interest will increase 3 basis points to 5.25 per cent per annum.

– The standard variable rate for interest only owner-occupier home loans will increase by 25 basis points to 5.47 per cent per annum.

– The standard variable rate for principal and interest investment home loans will increase by 24 basis points to 5.80 per cent per annum.

– The standard variable rate for interest only investment home loans will increase by 26 basis points to 5.94 per cent per annum. This change is separate and in addition to the announcement on 15 February 2017, when we announced an increase to the Standard Variable Rate for Interest Only Investment loans, which will be increasing to 5.68% from 3 April 2017.

– Viridian Line of Credit rates will increase by 0.26% p.a. to 6.08% per annum for loans with a personal and Investment purpose. This change is separate and in addition to the announcement on 15 February 2017, when we announced an increase to the Viridian Line of Credit Rates, which will be increasing to 5.82% from 3 April 2017.

– The Equity Unlock for Seniors Rate remains unchanged.

Our P&I Standard Variable Rate for Owner Occupiers remains the equal lowest standard variable rate among the major banks.

Cash Flow A Barrier To SME Growth

From Australian Business Review.

Cashflow issues are costing SMEs a potential $200 billion in lost revenue each year.

East & Partners has based these revenue estimates on ABS data that total revenue for the A$1 – 20m SME segment is A$1.3 trillion, and given 1150 of 1250 SME survey respondents indicated that better cashflow could have improved their revenue by an average of 18.7 percent, this has been extrapolated to indicate $222.5 billion additional revenue.

Three-quarters of SMEs who identify as being in growth phase say better cashflow would have produced revenue growth of 10 to 50 percent in 2016, Scottish Pacific CEO Peter Langham said.

Since September 2014 Scottish Pacific, Australia’s largest specialist working capital finance provider, has engaged specialist research firm East & Partners to conduct six monthly polls of more than 1200 small to medium enterprise leaders across all states and key industries, to test SME sentiment and concerns.

The Scottish Pacific SME Growth Index out today shows a record percentage of businesses plan to use non-bank financing (22 percent, doubling from 11 percent in Round One, September 2014). This contrasts with declining bank borrowing intention (29 percent, significantly down from 38 percent in Round One).

As well as the growing intention to fund business by using non-banks, just under 95 percent of SMEs indicated they planned to use their own funds to support their business, and once again respondents cited access to and conditions of credit in their top three barriers to business growth.

“It seems the day is approaching when non-banks will match or pass the banks as the first port of call for small to medium business funding,” Langham said.

“With interest rates at record lows, SME access to credit should not be a problem. And yet SME owners and leaders indicate that their full credit appetite is not being fulfilled.

“In light of ASBFEO’s Small Business Loans Enquiry which highlighted the need for a fast solution for small businesses at loggerheads with their banks over access to finance, it’s important for SMEs and their advisers to be across the full range of finance options available to them,” he said.

Only 8.5 percent of all SMEs reported that they were satisfied with their cashflow (just 5 percent of growth SMEs were satisfied). Seven out of ten, whether growth, consolidating or declining SMEs, said better cashflow would have improved 2016 revenues by more than 5 percent.

Seven out of ten growth SMEs indicated improved cashflow would have produced at least 10 percent revenue growth, with almost a quarter saying they could have achieved 25-50 percent revenue growth.

“Regardless of whether an SME had a growth or negative growth forecast, this clearly indicates the significant impact improved cashflow would have on revenue growth,” Langham said.

“The smaller the business, the greater the impact of improved cashflow, with strong indications that improving cashflow early in the life of a business has a major long-term impact on revenue growth.”

96 percent of $1-5 million revenue businesses agreed that better cashflow would have increased their 2016 revenue (with an average improvement of 23 percent); 85.5 percent of $15-20m businesses agreed, with an average revenue increase of 11 percent.

Mr Langham said the stark reality for CFOs and corporate treasurers in the SME sector was that nine out of ten firms say they could have better cashflow management.

“The unhappiness around cashflow is higher for growth businesses, as opposed to those with steady or declining revenue. It is cited as a major growth barrier by 56 percent of growth SMEs, but only by 20 percent of SMEs in a consolidation or declining growth cycle,” he said.

Langham said that in this round of the Scottish Pacific SME Growth Index, Australia’s SME owners seem to have bounced back from the pessimism they voiced in the previous round, September 2016.

“SME business confidence is on the rise, but fragile. Trend analysis shows just over 49 percent of SMEs are expecting revenue increases in the first half of 2017, a drop from 63 percent in our first round in late 2014. Since 2014, average positive revenue forecasts for growth SMEs have remained at around 4 percent, yet the average revenue drop predicted by negative growth SMEs has blown out from 5 percent to 8 percent.”

SMEs listed their top three barriers to growth as high or multiple taxes (71 percent), credit conditions (65 percent) and credit availability (61 percent). Key growth drivers are core customers (41 percent), strong staff (38 percent) – and more concerning, good luck (31 percent) and ‘just following our nose’ (37 percent).

“We’ve seen an increase in the number of SMEs citing credit conditions as a growth barrier, from just over 50 percent in 2014 to now above 60 percent,” Langham concluded.

Why International Financial Cooperation Remains Essential

From iMFdirect.

Economic growth appears to be strengthening across the large economies, but that does not mean financial-sector regulation can now be relaxed. On the contrary, it remains more necessary than ever, as does international cooperation to ensure the safety and resilience of global capital markets. That is why the Group of Twenty (G20) finance ministers and central bank governors reiterated their support for continuing financial-sector reform at their meeting in Baden-Baden last week.

The 2008 global financial crisis was exceptionally severe in the magnitude, breadth, and persistence of its effects, but it is one in a long series of financial crises stretching back centuries. Not only do crises cause financial losses for professional investors; more importantly, they impose high human costs for those who lose their jobs, homes, and savings. To protect their citizens, governments generally adopt an array of financial regulations designed to reduce the risk of a failure that could reverberate across the economy. These include balance-sheet standards, insider trading rules, broader conflict-of-interest laws, and consumer protections.

Too far?

Some argue that such existing regulations go too far and mostly hurt the economy by reducing financial institutions’ profits and thereby their ability to provide essential services. They claim that banks and other financial institutions—acting in their shareholders’ interest—would not knowingly risk failure; even if they avoid insolvency, the damage to their reputations would put them out of business. Yet history abounds with examples of reckless behavior, ranging from the Dutch Tulip Mania of the seventeenth century to the subprime lending boom of the 2000s. And even when a financial firm’s managers soberly assess their own personal risks, they still may not be prudent enough from society’s perspective, because some costs of failure fall on others, such as their shareholders and the taxpayers who must ultimately pay if there is a government bailout.

But the task of financial-sector oversight, never easy, has become more complex over the past 50 years as financial activity increasingly crosses national boundaries. That is why national governments have stepped up collaboration to promote stability and create a level playing field in international financial markets.

The global scope of modern finance creates at least four major complications for national regulators and supervisors. First, it is hard to assess the operations of financial institutions that extend beyond their home countries. Second, financial firms may take advantage of regulatory differences among countries to place their riskiest activities in lightly-regulated locations. Third, complex institutions with operations spanning several national jurisdictions are harder to wind down if they fail. And fourth, countries might actively compete for international financial business while also supporting their national “champions” through lax regulatory standards. All of these factors undermine the stability of the global financial system, especially as financial instruments and networks become more complex.

Forums for international cooperation

To address these challenges, national regulators launched in 1974 a process of consultation and coordination under the aegis of the Basel Committee on Banking Supervision. The Basel Committee focuses on banking regulation, whereas the Financial Stability Board, set up by the G20 after the financial crisis of 2008, coordinates the development of regulatory policies across the broader international financial markets, bringing together national authorities, international financial institutions, and sectoral standards setters.

Governments cooperate through the Basel Committee and the Financial Stability Board because no single national authority, acting by itself, can guarantee the stability of its own financial system when banks and other financial institutions operate globally. International agreements on regulatory and supervisory standards discourage a race to the bottom by establishing a level global playing field for financial industry competition. More generally, when countries compete for business through excessive deregulation, all end up worse off because financial accidents become more likely, and, when they happen, are more severe and more likely to propagate across borders.

In the aftermath of the 2008 crisis, the Basel Committee undertook a major initiative, known as the Basel III accord, which includes higher minimum standards for both the quality and quantity of bank capital (the equity cushion that allows banks to absorb losses without going bankrupt and needing government support). While sufficient bank capital is vital, even higher capital levels could be threatened in a severe panic, so the accord includes additional measures to reduce banking risk. As a result, even though Basel III is still being phased in globally, banks are already much better capitalized and less vulnerable to market jitters than they were a decade ago.

The United States, which made banks recapitalize and restructure more aggressively after the crisis, recovered more quickly than countries that did not. But a safe global financial system needs more than balance-sheet constraints for banks. In parallel with the development of the Basel III standards, the Financial Stability Board created a common approach to handling the failure of the largest and most systemic financial institutions. It is critical that insolvent institutions can be wound down safely, even when they are big, international, complex, or otherwise would pose a threat to the broader financial system in case of failure. If they cannot, government bailouts are more likely, risk-taking is excessive, and market discipline is subverted.

Of course, financial regulation involves tradeoffs. In principle, requiring more capital and liquidity can raise the cost of credit for households and businesses or reduce market liquidity. So far, research studies indicate that any unintended consequences are relatively small. Yet the benefits of a safer financial system are unquestionably large.

Although the financial system is safer today, it is also true that financial regulations have become much more complex. In the United States, for example, the Dodd-Frank Act is more than a thousand pages long and has generated tens of thousands of pages of follow-up implementation rules. There is certainly room for simplification. For example, the threshold for designating banks as systemic and hence subject to enhanced regulatory standards, currently set at a balance-sheet size of $50 billion, might be made more flexible. Regulation of community banks could also be simplified without making the system riskier, as could the implementation of stress tests, which aim to assess banks’ resilience to potential economic and financial shocks.

At the same time, the core tenets of the new global regulatory regime must be preserved. Paradoxically, the relative resilience of financial markets in recent years, which is partly the result of more stringent internationally agreed standards, has itself been cited to argue that financial regulation is an excessive drag on growth. This view is shortsighted. As Hyman Minsky, a well-known writer on financial crises, put it, “success breeds a disregard of the possibility of failure…” In other words, policymakers should not be lulled into forgetting the hard lessons of the not-so-distant past. Continuing international financial cooperation remains essential—it is the solid foundation of a strong and stable world economy.