20 December 2013

Reuters: Path to a stronger financial system still strewn with dangers

More than five years after the collapse of Lehman Brothers, the task of unifying and strengthening financial rules in the world's biggest economic bloc and beyond is far from over. (Includes quote from Graham Bishop.)

Arguably the biggest hurdle is yet to come - a global agreement that offers a fast, failsafe way to wind down a major bank without the market mayhem that greeted Lehman's demise.

The EU has yet to publish a draft law on structural changes at banks. Deutsche Bank fired a warning shot on Friday, saying it must remain a universal bank with both retail and investment arms in order to be competitive globally.

European policymakers insist they have already proven they can overcome internal disagreements and resist fierce lobbying by the financial industry to score several victories. The bloc has reached deals on regulating the accounting sector, which gave banks a clean bill of health just before they had to be rescued in the financial crisis, and on strengthening protection of bank accounts.

"EU 2.0 is now on the launchpad as the integration from Banking Union is much greater than integration that has flowed from monetary union itself", said Graham Bishop, an adviser to the European Commission, the bloc's executive body.

But the list of what must still be done is daunting. Reform of shadow banking, the less regulated $70 trillion sector comprising money market funds, repurchase agreements and other elements, is unfinished business globally. "Banks, insurers and other financial services companies are having to deal with a fundamental overhaul of regulation and supervisory approaches, but the sobering fact is that the job is by no means done", said David Strachan of Deloitte.

Mark Carney, the Bank of England governor who chairs the G20's Financial Stability Board, said a global deal on requiring the world's biggest banks to hold extra reserves was the top priority for 2014 in order to finally solve the "too big to fail" problem. Without it, he said, regulators won't trust each other and will continue to act unilaterally, fragmenting global capital markets, which could slow economic recovery. "In the absence of international agreement, more capital and liquidity will be trapped locally and that is less effective and efficient", Carney told Britain's parliament this week.

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