The impending conference follows up on an initial summit in November to address the economic crisis, and will bring to the fore the need for international coordination both in crisis management and in regulatory reform.
A new report on regulatory reform in the European Union provides a preview of what EU government leaders will be seeking. The report, produced under the direction of Jacques de Larosière, former central bank governor in France and former managing director of the International Monetary Fund, is similar in scope and objective to a January report from a committee of the Group of 30 under the chairmanship of former Federal Reserve chairman Paul Volcker.
The EU report faults central banks and other regulators for failure to see the systemic risk posed by the increase in leverage among individual institutions. "Regulators and supervisors focused on the micro-prudential supervision of individual financial institutions and not sufficiently on the macro-systemic risks of a contagion of correlated horizontal shocks," says the report, authored by De Larosière in collaboration with other former finance officials. "Strong international competition among financial centers also contributed to national regulators and supervisors being reluctant to take unilateral action."
The report urges creation of a European Systemic Risk Council under the chairmanship of the European Central Bank president. It also proposes establishment of EU-wide authorities to coordinate supervision of banking, insurance and securities firms. Together, these would constitute a new European System of Financial Supervision.To promote global coordination of financial regulation and supervision, the group suggests expanding and strengthening the Financial Stability Forum, including appointment of a full-time director. The FSF should report regularly to the International Monetary and Finance Committee (the former Interim Committee of the IMF), which should itself be granted decision-making powers. In addition, the IMF should be given added resources to beef up its macroeconomic surveillance and early warning systems.
The group also supports the colleges of supervisors for cross-border financial institutions that were suggested at the November summit.
As with the G30 report or the Treasury blueprint from last spring, the latest wish list on regulatory reform is not likely to be implemented in full, but it provides a number of talking points for officials as they grapple with the task of rebuilding the global financial infrastructure. It also indicates some growing areas of consensus among national regulators.
For instance, the De Larosière report recommends a review of the Basel 2 prescriptions on bank capital. It urges adoption of the "dynamic provisioning" first adopted by the Bank of Spain for that nation's banks, requiring banks to build up capital in good times. This serves the dual purpose of putting brakes on the expansion of credit and creating a buffer when times turn bad.
Similar recommendations came in Fed chairman Ben Bernanke's recent talk at the Council on Foreign Relations and in off-the-record previews of the U.S. Treasury proposals for the G20 summit.
Other recommendations from the EU report echo reform proposals in the U.S.:
The EU report calls for the transformation of the current Banking Supervision Committee at the European Central Bank into a European Systemic Risk Council that will conduct macro-prudential supervision. The group specifies that the ECB should not get into micro-prudential supervision of individual institutions because this would interfere with its task of managing monetary policy. But the ECB should interact with the micro-prudential supervisors in each member country and get the information it needs to monitor systemic risk.
For creation of a European System of Financial Supervisors, the group recommends a two-step process. Over the next two years, the existing level 3 committees -- the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Regulators (CESR) and the Committee of European Insurance and Occupational Pensions (CEIOPS) - should be upgraded with additional resources and powers in preparation for become full-fledged authorities to oversee banking, securities and insurance regulation EU-wide. Rules and regulations should be harmonized as much as possible. Then in 2011-2012, the three committees would be legally transformed into new authorities.
European Commission president Jose Manuel Barroso mandated De Larosière to come up with a report on financial regulatory reform in time for the spring meeting of the European Council. The "High-Level Group on Financial Supervision of the EU" held 11 full days of hearings with numerous officials, including ECB president Jean-Claude Trichet and FSF chairman and Bank of Italy governor Mario Draghi, as well as several industry groups.
De Larosière was also on the steering committee that produced the Volcker G30 report. Other members of the EU group were Otmar Issing, a former governor of the German central bank; Onno Ruding, a former Dutch finance minister and vice chairman of Citicorp; and Leszek Balcerowicz, a former Polish finance minister and central bank governor. The most controversial appointment to the group was Callum McCarthy, head of the UK's Financial Services Authority until last September and how widely criticized for having too light a touch as a regulator.
Darrell Delamaide reports exclusively on financial regulation news and trends for FinReg21. Darrell is a veteran financial journalist who has worked for Dow Jones, Bloomberg, Institutional Investor, among others. He is based in Washington, D.C.
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