‘Developing an effective framework is biggest challenge facing regulators’

Developing a coherent and effective framework is the biggest challenge facing regulators in the post-crisis environment, according to the new deputy governor of the Central Bank, Cyril Roux.

“Financial regulation has effects at a local level, national level, and international level,” he said.

“A common approach to regulation is needed for it to be effective. Restrictions on short-selling, high frequency trading, or large bonuses may or may not make sense, but in any case they make very little sense within the confines of a single jurisdiction.”

Mr Roux was making his first public appearance as Matthew Elderfield’s replacement, speaking at a conference organised by the Central Bank.

Regulators depend on a variety of tools which operate on different levels, and the responsibility for regulation can fall on different bodies and institutions. However, it is crucial, Mr Roux said, that there is a harmonised framework if regulation is to work properly.

Andy Haldane, executive director for financial stability at the Bank of England, said that if the new macro-prudential regulatory framework had been in place before the crisis erupted in 2008 then it would have delivered a better outcome for the economy by 20% and a better outcome for the financial system by 40%.

Prior to the crisis, the focus of regulation had been on micro-prudential supervision, which was aimed at protecting firms from each other and financial firms from the real economy.

The aim of macro-prudential supervision was to “protect the real economy from the financial system and the financial system from itself”.

He said responsibility for enforcing this regulation should lay with central banks and it was compatible with setting monetary policy.