Virtual currencies and the blurred line between financial institutions, telecommunications and technology companies pose regulatory challenges, RBA says.
Virtual currencies and the blurring between financial institutions, telecommunications and technology companies could pose big challenges for global regulators.
Almost six years on from the collapse of Lehman Brothers, Reserve Bank of Australia (RBA) Governor Glenn Stevens says one of the greatest challenges facing financial regulators is assessing when an activity “outside the perimeter” might threaten stability.
“Devoting a lot of resources to ever greater refinements to the details of existing regulatory structures will not help us do that,” Mr Stevens said in a speech to the US Federal Reserve Bank of San Francisco’s Symposium on Asian Banking and Finance.
“Having the big things inside the perimeter about right should be good enough.”
He said technological change would probably not make it easier to monitor the situation.
“The possible rise of virtual currencies, the potential for the distinction between regulated financial institutions and telecommunications and technology companies to become blurred may pose challenges,” Mr Stevens said.
“They doubtless will not be the only ones.”
It was important that regulators and the public monitored promises made by financial players and the extent of leverage involved.
If a major private financial failure occurred, policymakers would still face a decision of whether to close or support the institution, he said.
“The policy task is not, in my view, one of ensuring that the probability of such an event is absolutely zero, but of making it acceptably low at an acceptable price,” Mr Stevens said.
While there would always be some risky activity around the fringes of the system, there was nothing particularly wrong with that, he said.
“Those who seek high returns, and are prepared to accept the risk, should be allowed to do so. There is value in that occurring,” Mr Stevens said.
Still, he stipulated that such risk-takers had to be able to safely wear the losses.
Ahead of the G20 Leaders summit in Brisbane in November, regulators are looking to apply lessons learnt during the financial crisis.
These would include the nature of risk, incentives that allowed the risk to build up, contagion and the weaknesses in managing a crisis.