FINANCIAL ENGINEERING AND FINANCIAL REGULATION ENGINEERING

Abstract

Financial engineering has changed not only the way business is conducted in the finance sector, but also the everyday lives of ordinary people in the world's leading economies, as has been observed over the last two decades. In certain post-crisis statements, structured goods were referred to as weapons of mass destruction. However, it is safe to say that few people were aware of the existence and dangers of these instruments prior to their introduction. The author discusses how financial regulation and supervision failed to understand/manage financial engineering products during and before the global financial crisis using a literature review and case study research. We address steps to strengthen good regulatory governance in engineered products in this context. We conclude that, while engineered goods have significant economic benefits, the regulatory/supervisory framework should be changed to enhance firm/system risk management. Second, there are four elements that can be improved to strengthen the prudential regulatory/supervisory system for standardised goods. These include taking prompt and appropriate action to address balance sheet issues, the efficacy of risk management, improving the independence and efficiency of prudential regulation/supervision, and the supervisory responsibility.