"It is important to not overlook areas of progress in the post-crisis regulatory reform process. Basel III has improved the quality and quantity of capital held by banks. Other improvements such as the lesser-known creation of a net-stable funding ratio have built on capital adequacy standards to strengthen the resiliency of the financial system.

Despite this, critical vulnerabilities remain. First, despite improvements at the international level there is evidence of back peddling at the domestic level. The EU was condemned by international regulators for softening financial standards for small business loans and weakening the quality of capital under the EU's Capital Requirement's Directive IV.

Elsewhere, East Asia continues to be reticent in adopting financial standards for OTC derivatives. Playing a wait and see strategy, East Asia does not appear to be committed to meaningful OTC derivative reforms and aims to carve out a competitive advantage from relatively weaker regulation in order to strengthen its position in the international financial system. This trend highlights a worrying trend.

Domestic politics is contributing to the divergence of national financial regulation, making the supervision of global financial markets more difficult and ineffective. This trend is a far cry from the vision of the G20 at the beginning of the crisis in 2008.

The absence of progress in shadow banking and cross-border resolution are of particular concern. Financial regulators and policymakers seem perplexed by how to design an effective regulatory regime for the shadow banking system due to the legal and financial complexities that this system of banking poses. Proposed interventions into tri-party repo markets by the U.S. Federal Reserve and the FSB's release of a regulatory framework for Haircuts on Non-Centrally Cleared Securities Financing Transactions are both promising developments. Reforms to mortgage underwriting standards and other areas of reform aimed at improving consumer protection and the quality of borrowers within securitized debt products will support the strengthened resilience of shadow banking markets in the U.S. and Europe. However, vulnerabilities in China’s financial system and the lack of transparency within its large shadow banking system could have far-reaching and significant consequences for the global financial system."