Financial Update (January-March 2000)

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Cover Story

Technology Brings Regulatory Challenges

Golden Dollar

New $5s and $10s

New Law Expands Banks' Activities

DEPARTMENTS

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Data Bank

The Docket

Technology Brings Regulatory Challenges, Guynn Says

Through opportunities brought about by technological advances, the financial services marketplace moves much faster today than in the 1930s, when many banking laws were established. As a result, banking regulators will increasingly rely on market developments as an indicator of a financial institution's safety and soundness. But have regulators become irrelevant in today's fast-paced world of financial services?

Jack Guynn, president and CEO of the Atlanta Fed, said recently that while the role of regulators has changed because of market developments, doing away with regulators is unrealistic since the market's interests are not always aligned with taxpayers' and consumers' interests.

According to Guynn, regulators must
redefine safety and soundness.

Speaking to the American Institute of Certified Public Accountants in Washington, D.C., Guynn did argue, however, that regulators must change their approach to regulating banks by addressing today's challenges, which include coming up with new ways to ensure safety and soundness, contain systemic risk and achieve greater transparency so that the markets can exercise discipline.

According to Guynn, regulators must redefine safety and soundness. "The goal will always be the mitigation of systemic risk, but it may no longer be possible or desirable to mitigate risk by preventing the failure of individual institutions," he said.

The next challenge is containing risk. Guynn said that because examiners cannot keep up with the market, they should enlist the market to help firms police themselves while shifting most of the risk of failure back to the private sector.

Finally, an ongoing challenge for regulators and industry participants will be determining what constitutes transparency, Guynn said. The key will be to find a balance between releasing information that helps the market evaluate risk and not requiring the disclosure of proprietary information. He said that markets might be better served through the disclosure of information about an institution's credit risk, the general nature of its credit composition and its potential exposure in its securitization practices.

For the complete text of the speech, click here.