To simplify, I believe that the logic underlying the current regulatory system consists in ensuring the financial stability of market segments, but without adopting an overall approach. However, the crisis has forced us to acknowledge that this fragmented approach to regulation does not necessarily ensure the stability of the entire financial system. During this crisis, the fact that financial institutions had considerably increased their use of leverage and that risk was concentrated among a relatively small number of banks was neither well assessed, nor well captured, nor prevented by regulation. In view of this failure and in order to mitigate the impact in terms of financial instability, government interventions were designed, not to stabilize the situation of any particular institution, but to prevent systemic risk from materialising. As a result, we now require macro-prudential regulation. This naturally leads us to address the issue of the scope of financial regulation. Who should be regulated? The problem is not new; it is also complex. Like me, you will have noticed that, at their last summit meeting, the G20 Heads of State and Government laid down a clear principle on the matter. They have indeed committed themselves to ensuring that “all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances”. The crisis shows quite clearly that the markets and institutions that have a systemic role must be regulated. This criterion implies re-examining the functioning of certain OTC markets, such as the interbank money market or the credit derivatives market.

Similarly, rating agencies should also be regulated, given the key role they play in correcting information asymmetries on financial markets. Lastly, public authorities should pay greater attention to those financial institutions that are central to the supply of market liquidity and financing. An important starting point is to acknowledge that financial system participants have very different functions, pursue different strategies and operate according to different economic models. This diversity is crucial to the smooth functioning of markets. A one-size-fits-all  BIS Review 161/2008  1  regulatory framework applied to all participants would certainly give rise to herd behaviour and, consequently, reinforce the endogeneity of certain risks. A gradation could reasonably be applied to the regulations and requirements imposed on financial system participants. Three levels, ranging from oversight to regulation, naturally come to mind. The first level would take the form of a mandatory registration and the commitment to comply with a code of good practices. The second – more restrictive – level would include disclosure obligations with regard to activities and accounts, in addition to the mandatory registration and the compliance with good practices. Hedge funds and, more generally, institutions pursuing strategies essentially based on leverage or risk-taking could have to meet such requirements. Finally, the last level would involve more restrictive regulations with regard to activities and risk-taking, as well as closer oversight. In many respects, this gradation system is not only relevant with regard to prudential requirements. It should also apply to accounting rules for example.