In addition, prudential regulations have lagged behind.

The National Security Act 1992 Financial Institutions Act 1992 Prudential Regulation 2002 Bhutan Penal Code 2004.

Such a reliability requirement merely transfers the prudential judgement from the relying party to the judge or adjudicator.

As people become more familiar with electronic signatures, they will become more experienced at making that prudential judgement.

UNCTAD is providing assistance to Burundi to establish its strategies for legislation and the prudential regulation of its insurance sector.

The Basel Committee, in its Customer due diligence for banks (CDD) paper of October 2001, issued prudential guidance in this area.

These are the Royal Monetary Authority Act 1982, Financial Institution Act 1992, Foreign Exchange Regulations 1997 and the Prudential Regulations 2002.

People are currently less familiar with the potentials and vulnerabilities of methods of signing electronically, and may be less proficient in making that prudential judgement.

The judge or adjudicator may be no more competent to make that prudential judgement, although he or she may have the benefit of expert evidence.

The financial institutions are required to comply with the requirements of section 18.3 of Prudential Regulations 2002, which pertains to the Know your customer policy .

Third, a country s financial sector must be both open, with no capital flow restrictions, and sophisticated, with a wide range of instruments and institutions. It must also be safe, with a central bank maintaining economic stability, prudential regulators keeping fraud and speculation in check, macro prudential authorities displaying adequate financial fire fighting capabilities, and a legal system that is predictable, transparent, and fair.

After the crisis, world leaders and central bankers overhauled banking regulations, first and foremost by rectifying the Basel prudential rules. Unfortunately, the new Basel III Accord and the ensuing EU Capital Requirements Directive have failed to correct the two main shortcomings of international prudential rules namely, their reliance on banks risk management models for the calculation of capital requirements, and the lack of supervisory accountability.

The use of the Lisbon Treaty clause means that the ECB must be given these additional responsibilities. But it is impossible to create a separate bank supervision entity within the ECB, as has been done in France, for example, with the Prudential Control Authority, or in the UK with the new Prudential Regulatory Authority, which has its own board and accountability arrangements within the Bank of England.

For example, audit, entry and annual fees, tax on business profit, prudential requirements such as minimum capital, bank guarantee and minimum managerial experience as required in some States.

Other countries adopted slightly different models. A fashionable approach was known as twin peaks, whereby one regulator handled prudential regulation setting capital requirements while another oversaw adherence to business rules.

Nor do large international reserves guarantee financial stability. There are better ways to enhance stability, from strengthening prudential supervision to taxing and controlling destabilizing capital flows and letting the exchange rate adjust.

Senior officials responsible for banking supervision or financial stability issues in central banks and authorities with formal responsibility for the prudential supervision of banking business where this is not the central bank.

The implication is clear Central banks should focus on developing more effective macro prudential instruments. They should widen the regulatory perimeter that is, they should work to bring nonbank financial institutions under their regulatory umbrella.

Sadly, the financial revolution has been mostly rent seeking rather than welfare enhancing in character. It has been based on eliminating, or at least reducing, two key elements of banking costs closely associated with prudential arrangements.

There, unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses become the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation.

Irresponsible risk taking and excessive greed outpaced prudential regulation and supervision. The banking system ended up fueling massive speculation, including a huge run up in real estate prices, only to be brought to its knees when the bubbles popped.

A similar institutional design could be adopted for prudential policies. A denser network of institutions seems better adapted to a heterogeneous international community, and it is likely to provide better services and give a stronger voice to smaller countries.

Specifically, China needs prudential regulation that limits the use of leverage for asset purchases. Here, the country already has an advantage relatively high levels of equity and low mortgage to value ratios typically characterize real estate purchases by China s household sector.

A similar change has been introduced in France, where a new Prudential Control Authority has been created. The British and French rarely agree on anything one is tempted to say that when they do, they are highly likely to be wrong.

Thus, the IMF s recommendation to use capital controls only after exhausting interest rate adjustment, reserve accumulation, and prudential regulation is out of step with the profession. Indeed, recent work in economic theory shows that capital controls can actually be the optimal policy choice.

Now that the European Banking Authority has finally issued new prudential rules, they can get about the business of raising the capital they need as a buffer against losses. Société Générale has moved in this direction, but few other banks have followed so far.

New member states should continue pursuing macroeconomic stability and financial discipline, particularly with respect to public finances. Along with strong prudential supervision, this should help manage the vulnerabilities of capital account volatility and credit booms, and lay the groundwork for the eventual adoption of the euro.

Those who believe that all was fine with the pre crisis economy except for banks making crazy loans are convinced that preventing such crises in the future requires only banking reform. The new reform orthodoxy is macro prudential regulation of commercial banks by the central bank.

The problem was that the Fed s macro prudential instruments were undeveloped. No sooner did the Federal Reserve System s member banks limit their provision of credit to purchasers of securities than non member banks, insurance companies, and trust companies ramped up their lending, allowing the stock market to race ahead.

A further distortion stems from the prudential regulation adopted in reaction to the global financial crisis. The imposition of higher capital requirements on riskier investments has pushed financial institutions into holding government debt, which in turn means that they have less money available to lend for productive investment.

In their efforts to resolve such dilemmas, policymakers are also wrestling over whether to focus on traditional monetary tools such as interest rates, or make greater use of so called macro prudential measures, such as capital add ons and buffers or adjustments to banks loan to value ratios.

Second, emerging countries must develop more effective macroeconomic frameworks, including better macro prudential regulation and a broader monetary policy framework that takes into account asset prices and financial market stability. A wide range of official measures could be employed to support domestic demand while protecting medium term fiscal sustainability.

Bank of England Governor Mark Carney has taken the lead in initiating a prudential review of the impact of climate change on the United Kingdom s insurance sector. Other institutions including multilateral bodies like the Bank of International Settlements, the Financial Stability Board, and the G 20 should follow suit.

Thus, during periods of expansion, when banks are eager to fund ever more risky borrowers, the reserve ratio rises, curbing potentially disruptive asset bubbles or overinvestment. For those countries capable of designing and implementing prudential regulations, management of cross border capital flows becomes less useful and less desirable.

To respond to inflation by increasing interest rates would simply compound the difficulties of high prices with high unemployment and an even less competitive exchange rate. Direct interventions, restrictions on short term capital inflows, capital gains taxes, and stabilizing prudential banking regulations will all have to be considered.

It follows, then, that prudential regulation and competition policy in banking should be coordinated. This is all the more true in crisis situations, in which a protocol of collaboration should be implemented to delineate liquidity help from recapitalization, and to establish the conditions for restructuring in order to avoid competitive distortions.

Credibility The eurozone s new banking supervision mechanism will have the ECB at its heart. The choice of tasks to be entrusted to the ECB will ensure rigorous, high quality, and equal prudential supervision of eurozone banks, thereby contributing decisively to maintaining confidence between the banks and thus increasing financial stability throughout the eurozone.

A legal vestige of the original plan may offer an easy path to a greater ECB supervisory role today. According to Article 25 of the Maastricht Treaty, the ECB may offer advice to and be consulted by the Commission or the Council on the scope and implementation of legislation relating to prudential supervision.

But any summons to a Bretton Woods II conference must be concrete in its content. A global system for prudential regulation and supervision a revamped IMF managing a global reserve currency, coordinating global macroeconomic policy, and providing agile credit lines and an international debt court all of these must be on the agenda.

Under Section 19 of the Prudential Regulation 2002, which deals with on site examination of financial institutions the Financial Institutions Supervision Division of the Royal Monetary Authority, as part of its vigilance and surveillance system, conducts frequent on site visits of the financial institutions to specifically check and verify their financial operations.

Platforms that offer basic deposit and loan facilities should be classified as banks, whose transactions entail credit, liquidity, and trading risks that merit prudential supervision alongside measures like risk based capital requirements. Nonetheless, it is important not to overburden these firms with complex, high level capital adequacy requirements that would impede their operational flexibility.

History teaches that such swings are not sustainable, and that the more excessive they become, the sharper and more costly are the eventual reversals and the graver the consequences for the financial system and the economy. The lesson of this crisis is that excessive swings need to be dampened with a set of prudential measures.

Improving the ability of financial markets to self correct to sustainable values is the entire point of prudential regulation. By contrast, wholesale restrictions on short selling (and other such measures that pay no regard to whether an asset is over or undervalued) an option that some have suggested could actually lead to greater instability.

To understand the precise problem, you must dip into the latest details of the Prudential Regulatory Authority s capital shortfall exercise with eight major UK banks. I won t pretend that the PRA s work is easy reading for a layperson but anyone who spends a little time with the documents will first laugh and then cry.

And our understanding of macro prudential regulation and how that affects financial stability is still at a very early stage. The consequences of poorly understood interconnections among countries have repeatedly blind sided the world s major central banks consider the euro crisis or European banks heavy reliance on financing from US based money market funds.