Central bankers warned that a global economic recovery shouldn’t delay an overhaul of financial market regulations following the worst banking crisis since World War II.
US Federal Reserve Chairman Ben Bernanke used a weekend Fed symposium to single out the creation of rules limiting risk as one of the “difficult challenges” ahead. European Central Bank (ECB) President Jean-Claude Trichet said “green shoots” weren’t enough for him to declare the recovery sustainable and cautioned that officials must do “an enormous amount of work.”
Bernanke and Trichet renewed their push for changes to global finance just four weeks before leaders from the G20 meet in Pittsburgh, Pennslyvania, to discuss efforts to avert future financial crises. Monetary policy makers are concerned that political momentum behind creating tougher capital standards and other regulation may wane as credit markets stabilize and the global recession shows signs of easing.
“The talk in the hallways is concern about whether the regulatory reform legislation will go through,” New York University professor Mark Gertler said in an interview at the annual gathering at Jackson Hole, Wyoming, sponsored by the Kansas City Fed.
“The concern is the politics” of devising and implementing tougher oversight, said Gertler, who has collaborated with Bernanke on research.
Australian Treasurer Wayne Swan said yesterday the G20 would advance regulatory changes.
“Ministers will be committed to implementing reforms to the global financial system and ensuring we support recovery in developing countries,” he said in a weekly newsletter.
Swan and other G20 finance ministers plan to meet in London on Sept. 4 and Sept. 5.
Emergency programs by the Fed, ECB and other central banks have helped unfreeze lending and revive financial markets. The Standard & Poor’s 500 Index, after tumbling 38.5 percent last year, has risen 51 percent since a recession low on March 9. The London Interbank Offered Rate for three months loans in dollars fell to 0.39 percent on Friday. The rate surged as high as 4.81 percent in October.
The global banking system may require “radical restructuring” to avoid future crises, Bank of Israel governor Stanley Fischer, a former vice chairman of Citigroup Inc, said at the Fed meeting, which excludes the elected officials who would debate and approve laws behind any regulatory crackdown. Policy makers should consider limiting the size of banks and have the option of reining in proprietary trading, he said.
“We have all identified the key challenges to be done, but we do not address the key of how can this be implemented,” Jacob Frenkel, a former Bank of Israel governor, said at the gathering.
While EU leaders agreed in June to unify financial system oversight, it is now up to their executive arm, the European Commission, to propose such legislation. Debate over the regulatory changes in capitals and the region’s parliament may last for more than a year.
The EU aims to create an economic-risk watchdog led by central bankers, along with agencies to unify oversight of banks, insurers, investment firms and credit-rating companies.
If officials in the US, Europe and elsewhere “move too quickly, they’re nervous that it could hurt the recovery,” Harvard University professor Kenneth Rogoff, a former chief economist at the IMF, said at the conference. “They’d like financial regulation — some distant future day.”
US President Barack Obama faces resistance to parts of his proposed regulatory revamping from lawmakers, regulators and the banking industry. He wants to make the Fed supervisor for the biggest financial institutions, create a consumer financial-products agency and strengthen oversight of executive pay, derivatives and credit-rating companies.
Lawmakers including Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, oppose expanding the Fed’s authority. Banks are lobbying against the consumer agency, saying it will undermine the availability of credit. Federal Deposit Insurance Corp Chairman Sheila Bair has said she opposes legislators who want to consolidate bank supervisory agencies.
Regulators drawing up stricter banking rules are focusing too much on large financial institutions, while overlooking the types of smaller companies that triggered the current crisis, like mortgage brokers in California and Northern Rock PLC in the UK, said Charles Dallara, managing director of the Washington-based Institute of International Finance.
“Viewing the world through a prism of large and complex financial institutions would probably have not led you to any of those potential sources of systemic risk,” Dallara said.
His organization includes as members Citigroup and Deutsche Bank AG.
A proposal to limit risk-taking by having central banks provide financial institutions with tradable insurance credits may backfire, said R. Glenn Hubbard, the Columbia University business-school dean and chairman of the White House Council of Economic Advisers under former US president George W. Bush.
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