In its bi-annual Financial Stability Report [http://www.bankofengland.co.uk/publications/fsr/2009/fsr25.htm], the Bank of England outlined its views on needed regulatory change for the financial services sector. Their areas of focus included: creating stronger market discipline, providing greater self-insurance, improving risk management among financial institutions, limiting the size and complexity of banks, and providing clearer principles for the role of public authorities in financial institution failures. Suggestions for market discipline include more detailed and more frequent public disclosure, including providing more data points and details on any balance sheet uncertainties. The Bank of England believes it is also important for banks to "face a credible threat of closure" if they do not maintain a stable infrastructure.
Banks must maintain greater insurance against future failures, through both third-party providers and contingency funding plans. Regulators must determine the standards for bank insurance and liquidity levels. As the level of bank liquidity has declined over recent years, it must "rise materially" for banks to be able to withstand market crises, and regulators should not rely on rating agency or other third-party opinions to determine whether a bank is appropriately solvent.
Increased reporting of relationships and connections between financial institutions is suggested to better inform regulators of inter-bank risks, both domestic and global. Common stress tests should be applied to various institutions to improve the understanding of these interdependencies. Future reforms could, for examples, include a system for imposing "symmetric obligations" on countries that have comparable surpluses and deficits, as well as a more widespread use of "central counterparty clearing" for over-the-counter cash and derivative instruments.
Regulators should also consider reducing the size and structure of financial institutions in order to prevent overconcentration in a small number of entities. This would aid in both supervising these institutions effectively and absorbing any market effects of individual failures.
Finally, regulators need to determine a clear set of principles for the role their government would play in future financial crises in order to minimize risks to public finances and avoid "encourag[ing] imprudent behaviour by financial institutions."
For a brief overview of the Bank of England's Financial Stability Report, see http://www.bankofengland.co.uk/publications/fsr/2009/fsroverview0906.pdf.