Yesterday the Joint Forum, a group established in 1996 by the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) to deal with issues common to the banking, securities, and insurance sectors, released “Review of the Differentiated Nature and Scope of Financial Regulation – Key Issues and Recommendations”, which addresses key issues and recommendations on the differentiated nature of financial regulation. This report was prepared at the request of the Financial Stability Board at the G-20’s November 15, 2008 meeting and was also identified in the G-20’s March 25, 2009 report on Enhancing Sound Regulation and Strengthening Transparency, which called for an identification of potential areas where systematic risks may not be fully captured in the current regulatory framework and recommendations on needed improvements to strengthen regulation of the financial system.

The report addresses five key issues areas:

  1. Key regulatory differences across the banking, insurance and securities sectors. The Joint Forum compared the core principles of supervision in these three sectors to identify common principles and to understand any differences. The report concludes that there is room for greater consistency among the sectors’ core principles, as well as the standards and rules applied to similar activities conducted in different sectors.
  2. Supervision and regulation of financial groups. The report focuses on the differences in treatment of unregulated entities when calculating group capital adequacy, intra-group transactions and exposures, including those involving unregulated entities, and unregulated entities, particularly unregulated parent companies of regulated entities
  3. Mortgage origination. The report recommends consistent implementation of minimum underwriting standards by all types of mortgage providers worldwide and proposes a review and disclosure of mortgage underwriting practices for each country.
  4. Hedge funds. The report highlights the potentially significant impact that hedge funds, given their role in the economy, could have on the financial markets, particularly given a hedge fund’s internal organization, risk management and measurement, reporting requirements and international supervisory cooperation, minimum initial and ongoing capital requirements for systematically relevant fund operators, and procyclicality and leverage-related risks posed by the pool of assets.
  5. Credit risk transfer products. The report discusses the inadequate management of risks associated with various types of products designed to transfer credit risk, such as credit default swaps and financial guarantee insurance.

While the United States has begun its own financial regulatory overhaul, Comptroller of the Currency John C. Dugan, Chairman of the Joint Forum from September 2007 to December 2009, stated that this “report sets the stage for additional important work that will lead to greater convergence of the supervision of financial activities and firms.” BIS announced that Tony D’Aloisio, Chairman of the Australian Securities Commission, has succeeded Mr. Dugan as Chairman of the Joint Forum.