The vast, pervasive nature of the credit-market disruption that has gripped financial markets for the better part of a year is leading to so many regulatory reform proposals that it’s hard to keep them all straight. Nevertheless, what’s clear is that the global financial system is due for some fundamental changes, as regulators scurry to patch up the holes that this crisis has exposed.

For the past nine months, the effects of the credit crisis have ebbed and flowed. Central banks have repeatedly pumped liquidity into the financial system in an effort to keep it well lubricated. In response, conditions have eased, only to tighten again as fresh fears arise. Estimates of the damage have grown relentlessly.

The latest version of the International Monetary Fund’s global financial stability report estimates mortgage-related losses at US$945 billion — with US$565 billion of that attributed to losses in the residential mortgage market and related securities, and the remainder coming in loans and securities related to commercial real estate, the consumer credit market and corporations.

Amid projected losses of this size, counterparty risk has risen; banks have continued to add to the total global write-downs and have been forced to seek additional capital to shore up their balance sheets. Also, the IMF report warns, with losses to non-bank financial institutions, “the danger is that there may be additional reverberations back to the banking system as the deleveraging continues.”

The causes of the crisis are, of course, numerous. But among them are gaps and weaknesses in regulation and supervision. These voids are quickly being filled with an avalanche of ideas for reform.

As the credit crisis is a global phenomenon, many regulatory reform proposals are also emerging at that level — flowing from the organizations that aim to coordinate the work of the world’s many regulatory authorities. This includes the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the Financial Stability Forum. In addition, theInstitute of International Finance — a global trade association for financial services institutions — is recommending a series of voluntary reforms designed to restore confidence and forestall a regulatory overreaction.

Given the scale of the problem, and the scope for improvement, it’s hard to keep a handle on the vast array of changes being proposed. The major areas that are addressed in these various initiatives include: toughening lending standards, increasing capital requirements, improving liquidity management practices, enhancing disclosure, beefing up risk-management practices, overhauling the credit-rating process, and attempting to improve the incentives driving bankers and traders.

Within these broad categories, many of the specific proposals target the structured products, off-balance sheet vehicles and complex securities that are at the heart of the credit crisis. Their use has flourished in recent years without garnering much regulatory attention.

Yet, despite the complexity of the markets involved, policy-makers have been quick to jump on many of the reforms being proposed. The FSF presented its final report on the causes of the crisis, along with its policy prescriptions, at the latest meeting of the G7 finance ministers and central bank governors in mid-April. Attendees heartily endorsed the FSF’s conclusions, calling for some of the recommendations to be implemented within the following 100 days.

Several of those immediate priorities actually fall on financial services firms directly, not regulators, namely: that the firms fully disclose their risk exposures, writedowns, and valuation estimates for complex and illiquid instruments; and that they strengthen their risk-management practices and capital positions.

The ministers and central bankers also want: accounting standard setters to start work on improving the accounting and disclosure standards for off-balance sheet vehicles and to enhance guidance on fair-value accounting; the Basel Committee to issue revised liquidity risk-management guidelines; and IOSCO to revise its code of conduct fundamentals for credit-rating agencies.

These demands appear somewhat empty as the regulatory initiatives were, for the most part, already in the works. The banks have been disclosing their exposures, rebuilding capital and enhancing risk management for their own purposes for several months now.

By the end of the year, the G7 wants to see the Basel Committee boost capital requirements for structured credit products and off-balance sheet vehicles, and issue guidance for banking supervisors on assessing banks’ valuation processes. It also calls on credit-rating agencies to adopt the reforms to be proposed in IOSCO’s revised code of conduct. And the G7 demands that regulators and central banks enhance their ability to assess stability risks by improving communication and cooperation and that banking authorities ensure they are able to supply liquidity and deal with faltering banks.

@page_break@A few days after the FSF report and the G7’s endorsement of its recommendations, the Basel Committee came out with its own set of planned reforms, which include those demanded by the FSF.

“Supervisors cannot predict the next crisis, but they can carry forward the lessons from recent events to promote a more resilient banking system that can weather shocks, whatever the source,” said Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, upon releasing the committee’s proposals. “The key building blocks to core bank resiliency are strong capital cushions, robust liquidity buffers, strong risk management and supervision, and better market discipline through transparency.”

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, reports that it is supportive of the reforms proposed by both the FSF and the Basel Committee. That means that Canadian banks are likely to face new capital charges and that they will be pushed to improve their risk-management, valuation and disclosure practices to conform with whatever new global standards emerge.

Indeed, banks may be doing many of those things themselves (except for raising capital requirements) at the behest of the IIF. In presenting its interim report of recommended best practices, the chairman of the IIF board, Josef Ackermann, who’s also chairman of Deutsche Bank AG, stressed that its report, “underlines the fact that the leadership of our industry recognizes its own responsibility to restore confidence in the financial markets, solve the problems that have arisen and prevent those problems from recurring in the future.”

Ackermann notes that the industry is committed to raising standards and improving best practices. “The financial services industry needs to increase transparency in several aspects of its work,” he added. “Many firms need to improve their risk management, liquidity management and conduit underwriting approaches significantly. Firms should also reconsider incentives and compensation structures.”

The committee that came up with these initial recommendations, which was co-chaired by Bank of Nova Scotia CEO Rick Waugh, aims to publish a final report this summer that includes best practice recommendations and possibly codes of conduct.

In addition to the changes that are likely coming for the big banks, there may also be some regulatory reforms in the offing for investment dealers. The Investment Dealers Association of Canada has begun a compliance sweep that targets the dealers’ involvement in the asset-backed commercial paper market fiasco.

It is reviewing all aspects of the dealers’ role in selling the ABCP to its clients to see whether rule changes need to be made or additional guidance is required to improve firms’ internal controls, risk-management practices and processes for determining suitability, conducting due diligence on new products, compensation structures, marketing and training. It will also be looking at how firms assess when a simple product, such as ABCP based on credit card receivables, morphs into something far more complex, based on instruments such as credit default swaps and collateralized debt obligations.

IDA president and CEO, Susan Wolburgh Jenah, says that the review is at an early stage, and hasn’t reached any conclusions yet about whether rule changes will be required. The IDA wants to see how firms are handling these issues, whether there are best practices out there that could have prevented some of the trouble, and whether it needs to be providing guidance or crafting new rules to avert similar trouble in the future.

In the meantime, Wolburgh Jenah admits that even she is having a hard time keeping up with the flurry of recommendations flowing out of various groups and committees that are rushing to tackle the issues exposed by the crisis. “There are lots of organizations that want to show that they’ve been proactive in dealing with this issue,” she says. “So, get in there, and form a committee, and make some recommendations. And that’s important. But sometimes where we fail is in the follow-up. We have all these reports out there, but then what happens?”

That’s the big question overhanging not only the rule proposals from various international regulatory groups but also the sweeping overhaul of the U.S. financial system’s regulatory structure that is being proposed by the U.S. Treasury.

The Treasury’s plan, which is being portrayed as the most significant reform to financial services industry regulation since the 1930s and the Depression, was in the works well before the credit crunch really hit. So, it goes well beyond addressing the current crisis.

Among other things, it would empower the U.S. Federal Reserve Board with a new role as the “market stability regulator”; it would also create a new prudential regulator and a new regulator to oversee the mortgage business; and it proposes merging the Securities and Exchange Commission and the Commodity Futures Trading Commission into a single regulator for both securities and derivatives. It is also intended that the combined SEC-CFTC would shift toward a more principles-based system — in an effort to make the U.S. system more flexible and competitive with the regulatory regime in places such as Britain.

The reforms being proposed are dramatic and it remains to be seen whether any of them get done. Henry Paulson, U.S. Treasury secretary, says that the major reforms shouldn’t really be pursued until the credit crunch has passed. And that could well outlast Paulson’s tenure at Treasury, as a new U.S. president will be elected later this year.

“My sense is that [the Treasury proposal] is intended to kick off a broad debate about the future of U.S. financial regulation,” says Doug Hyndman, chairman of the B.C. Securities Commission in Vancouver. “No one expects the major recommendations to be implemented soon, if ever.”

Nevertheless, the Treasury proposal may become fodder for the seemingly perpetual debate about regulatory structure here in Canada. “It is useful, however, for us to look at the analysis and consider whether there are ideas that we could use to improve Canadian regulation,” Hyndman adds.

Veteran industry observer Glorianne Stromberg says that the proposals by the U.S. Treasury highlight the fact that there are large segments of the industry that are unregulated, despite the plethora of regulators out there.

“There’s a need to start over with a blank page,” she says, “and design a regulatory oversight system that makes sense in the realities of today’s marketplace.” One of these realities is the need to globalize along with markets. IE