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Japan wary of ‘straightjacket’ regulation

Wednesday 20 October 2010 - by Will Henley

New international regulatory reforms should be flexible enough that national authorities are not constrained by a “straightjacket” of rules, the Bank of Japan has urged.

Deputy Governor Kiyohiko Nishimura, speaking this week at a seminar on macro-prudential policies hosted by the People's Bank of China and the International Monetary Fund, warned against setting standards that fail to take into account local financial circumstances.

Nishimura said: “A one-size-fits-all regulation, which some institutions in a specific jurisdiction could more easily circumvent, might eventually prove rather harmful to social welfare. Moreover, too rigid regulation might encourage less-transparent entities to replace banks’ businesses and thereby stimulate shadow-banking in some countries.

"A one-size-fits-all approach, which would put carnivorous lions and herbivorous elephants in the same cage, can never produce good results. We need to strike the right balance between rules and discretion in financial regulation.”

Nishimura said that in some national jurisdictions a traditional "buy-and-hold" model is dominant, in which banks rely on stable household deposits in their funding and make commercial loans.


"In such cases it is especially important for supervisors to grasp credit risks in banks’ loan portfolios," he said.

“However, in other jurisdictions, where an ‘originate-to-distribute’ model with market-based wholesale funding is more pronounced, supervisors should pay more attention to liquidity structure, the risk-profile of structured products and where the ultimate risk lies.”


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