A Study on the Subprime Crisis and Financial Supervision

Because of the highly integrated global financial system, the Subprime Crisis spreads quickly from the United States to other countries. Its spreading speed, breadth, and complexity have never been seen before. This study first discusses the causes and processes underlying the Subprime Crisis, as well as the financial innovation involved. Then, to examine the damage it may cause, this study introduces the crises happened to different types of financial institutions. Furthermore, this study analyzes financial supervisory reports and recommendations proposed by other countries’ governments and international financial supervisory organizations. Finally, considering the recommendations from them, together with the financial markets and laws in Taiwan, this thesis proposes the following recommendations, divided into short-term and medium- and long-term, for Taiwan’s financial supervisory authorities:.Short-term recommendations:.Reinforcing the oversight of mortgage products and lending practices.Supervising the appropriateness of compensation schemes in financial institutions.Implementing macroeconomic stress tests and requiring financial institutions to undertake stress tests.Implementing previews of offshore-structured products and restricting the types of counterparties that could participate in particular transactionsI.Medium- and long-term recommendations:.Evaluating the movement of standardized OTC trades onto a regulated centralized exchange system .Working with financial institutions to establish a database of securitized products, derivatives, and their underlying assets .Overseeing banks to conduct sound stress tests if they adopt the internal rating based approach for credit risk to capital requirement instead of the standardized approach.Examining capital adequacy for financial institutions and developing new counter-cyclical measures; considering international regulations of incremental capital charge and gradually increasing capital requirements.Assessing the cost of information disclosure and gradually requiring financial institutions to enhance the quality and quantity of information disclosure .Amending the existing law to prohibit credit rating agencies from conducting consulting services and to develop penalties for fictitious ratings .Improving information exchange and cooperation with international supervisory authorities .Providing fair value accounting and valuation guidance for corporations and performing strengthened audit of relating assumptions when implementing fair value accounting