The current crisis has made it crystal clear that, as designed, the form and conduct of financial regulation is not fit for purpose. It will not be enough for prudential regulators to adopt new measures within their current frameworks. There needs to be oversight of the system as a whole – including both systemically important institutions and systemically important markets.
This oversight may be best housed in those public institutions with a macroeconomic orientation. At a minimum, there must be close coordination between regulators, the central bank, and the finance ministry. As part of a new macroprudential approach, regulation must address three significant flaws in market structure – a lack of transparency, misaligned incentives, and inadequate liquidity.