In a press conference following a meeting in Paris of the IIF’s Steering Committee on Regulatory Capital (SCRC), Mr Frédéric Oudéa, Chairman of the SCRC, member of the IIF Board of Directors, and Chairman and Chief Executive Officer, Société Générale, noted that while a certain number of financial regulatory reforms have been agreed, a lot of work remains in order to put in place a balanced, workable regulatory framework.
Mr Oudéa stated that the global financial industry supports a fundamental strengthening of the global regulatory architecture. He said: “We welcome the progress by the Basel Committee and the industry will move forward to meet the challenging task of implementing the new capital requirements.” He stressed that major concerns exist in the industry over the Basel Committee’s liquidity regime; over the possibility of special capital surcharges on large, complex financial firms; and over the major challenges that remain to create an effective and clear framework to develop a cross-border resolution regime that can mitigate any future possible call on taxpayers in the event of a bank failure. On this latter key issue he called on the G20 to establish a high-level “multi-disciplinary” taskforce to forge agreements.
Macro-Economic Challenges
Speaking in Paris, Mr Dallara stressed that “the Euro Area authorities recognize that they need a comprehensive framework to address the sovereign debt crisis, consisting of both crisis prevention and crisis resolution measures. We welcome this recognition and believe it should be reinforced by a deepening engagement of private sector investors in good faith discussions with officials beyond the overall approach that is being developed. At the same time, on the other side of the Atlantic, the U.S. needs to set credible plans to reduce budget deficits and public debt."
He noted that many emerging markets are performing remarkably well. “Nevertheless, they are being challenged to address currency and inflation issues. In our report today we note the vibrant strength of private capital flows to these markets. We estimate these flows amounted to around $910 billion in 2010 and that they will rise further this year to about $960 billion and then exceed $1 trillion in 2012. These forecasts depend to a considerable degree on both the macroeconomic policy decisions that emerging markets are going to have to take, as well as actions that can and should be taken multilaterally to secure economic growth and stability.”
Critical Issues of Global Banking Regulation
Mr Oudéa said that “ensuring a level global playing field to secure efficiencies, to guard against unfair competitive advantage, and to reverse fragmentation in the financial system, all have to be priority objectives for the authorities. Individual jurisdictions should avoid adding further requirements to the global standard that has been agreed, or requiring accelerated implementation. It is also essential that the economic impact of regulatory reforms be monitored with vigilance – there can be no doubt that these reforms will have significant consequences for the financing of the real economy.”
Commenting on the new Basel Committee’s liquidity approaches, he noted: “It is crucial that the Basel Committee make full use of the observation and monitoring periods it has established and engage the industry in dialogue to examine the data on the actual impact of the measures, to identify unintended consequences, and to put in place the necessary corrections. As we see it, the regulations challenge the transformational role performed by banks, whereby individual savings can in turn ensure the funding of corporate investment.”
He noted that “several new liquidity measures will directly constrain the support provided to economic actors, such as backstop facilities for commercial paper and standby credit for all kinds of entities, as well as long-term financing of export credit and project financing. At the same time, they unduly discourage interbank lending and give incentives to excess concentration in sovereign debt. Further, they make unrealistically conservative assumptions about what asset classes are treated as liquid, thus unnecessarily restricting the use of assets that central banks have for years viewed as acceptable collateral. In addition, they fail to recognize the liquidity and stability of covered bonds.”
Mr Oudéa underscored that systemic risk is a complex phenomenon that requires an equally complex policy response. He said: “Focusing this response simply on large or complex firms will not produce the right answers. There are also real concerns about designating groups of firms as SIFIs. That will tend to differentiate these in the eyes of the market and there is a risk that this will create pressures for concentration and hence intensify the problem of ‘too big to fail’ rather than eliminating it. And the capital treatment of firms judged to be systemic is also of critical importance. We need to look at ways to increase the resilience and resolvability of these firms. Imposing simple capital surcharges is not the right way to strengthen systemic stability.”
On the issue of resolution, Mr Oudéa said that “we welcome the work being done under the auspices of the Financial Stability Board and the efforts the industry’s efforts that are being pursued under the leadership of the IIF’s Special Committee on Effective Regulation and its Working Group on Cross-Border Resolution. We believe there is a need to establish a comprehensive global approach to cross-border resolution.”
He continued: “We believe the time has come for the G20 leadership to establish a high level taskforce to create such a framework. We need to see a small multi-disciplinary group of officials from key countries, including officials from finance ministries, central banks, other regulatory authorities and ministries of justice, working under a G20 mandate, to forge agreements on a cross-border resolution regime. It should be possible to make progress if the political will exists and such a framework could make a major and lasting contribution to future financial stability.”
© IIF - Institute of International Finance
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