Warning on financial regulation

TOP OFFICIALS warned policymakers this week to avoid hurting global efforts to toughen up financial regulation as differences emerge over derivatives speculation, hedge funds and bank capital.

“We all sit in the same boat,” Financial Stability Board (FSB) chairman Mario Draghi told a European Parliament hearing. “We want to retain a globally integrated financial market. That is a prerequisite for stability and growth,” Mr Draghi said.

EU financial services chief Michel Barnier told the same audience he will propose controls on certain government debt derivatives to clamp down on speculation. Top US derivatives regulator,Gary Gensler, told the same forum on Tuesday that a ban on some types of credit default swaps will not work.

Critics say that if the EU were to introduce a ban on some credit default swaps trading, the market would simply shift to Wall Street to avoid the curbs.

Janet Cohen, a member of Britain’s upper parliamentary chamber, said Britain, the EU’s main derivatives centre, and Europe as a whole would lose out from restrictive rules. “I fear the Commission proposal on derivatives may not jive with what’s being arrived at globally,” Ms Cohen said.

The G20 group of leading countries pledged last year to co-ordinate new regulation for derivatives, hedge funds and bank capital, so that financial institutions avoid ending up with a repeat of the worst crisis since the Great Depression.

The FSB has been tasked to implement those pledges, but countries and blocs are already taking unilateral action – Britain on taxing bonuses, Europe on CDS contracts, the US on banning proprietary trading.

International Monetary Fund managing director Dominique Strauss-Kahn told EU lawmakers the worst of the crisis has receded, but there was a risk that a chance to create a new financial system may vanish.

“If we don’t go fast enough at the global level, what will happen is that countries begin to solve problems at the country level,” Mr Strauss-Kahn said. “They may propose different kinds of reform. The risk is unco-ordinated policy, distorted capital flows and regulatory arbitrage. This challenge is what we are facing now,” he said.

Apart from derivatives, differences have also emerged over hedge funds and bank capital in the past week. EU finance ministers delayed agreeing tough new bloc-wide regulation of hedge funds on Tuesday after opposition from Britain, home to 80 per cent of the industry in Europe.

It also followed complaints from US Treasury secretary Timothy Geithner, who said the rules would discriminate against hedge funds from the US.

Efforts to agree on a global tax or levy on banks to pay for bailouts are also facing an uphill battle, with Mr Strauss-Kahn effectively ruling out a so-called Tobin tax on financial transactions.

A global set of draft reforms to beef up bank capital and liquidity requirements so that taxpayer bailouts are less likely in future came under attack from France on Wednesday.

The Basel Committee of central bankers and supervisors from the G20 countries put forward the reforms in December to be implemented by the end of 2012.

“Their recommendations on liquidity and capital are severe, and taken together, risk seriously threatening the financing of the economy,” French economy minister Christine Lagarde told Les Echos daily.

Other countries are unhappy with Basel’s plans to cap bank leverage.

The FSB is due to come out with global proposals by November on how to deal with “too big to fail” banks, so they do not assume a taxpayer bailout will again be available if they hit trouble.

The US, however, stunned and confused policymakers around the world earlier this year by proposing to ban proprietary trading at deposit-taking banks – a far more radical solution than hitherto pledged by the G20.

Mr Draghi sought to play down the US move, saying “we should not expect a silver bullet for all instances” and that national solutions were likely on the “too big to fail” question. – (Reuters)