Financial Reform Watch

A "New Deal" in Bank Regulation?

In his visit to the White House this week, British Prime Minister Gordon Brown called for a global "New Deal" for financial industry regulation. While harmonization is always tricky across international borders, the outline of just such a new regulatory regime may have taken shape with the release last week of the long-awaited de Larosière report in Europe.

The analysis and recommendations outlined in the de Larosière report attempt to provide for a comprehensive view, and despite being quite drastic by many measures, most commentators seem to approve of the group’s recommendations. Some observers believe that the group should have gone even further.

Among the proposals is a new "European Systemic Risk Council," to be chaired by the European Central Bank, and a European System of Financial Supervisors, which would better coordinate the EU's national watchdogs. De Larosière also recommends accounting reforms, stricter capital requirement rules for banks, and extension of regulation to the parallel banking system, i.e. hedge funds and over-the-counter products.

The EC Commission will very soon make public its plans for transforming the de Larosière group’s recommendations into concrete policy proposals. The EU Council of Ministers will also soon deliberate on the report in detail, but it remains doubtful whether establishing a common EU position on the report and related matters will be possible before April. That could have a negative impact on the EU’s ability to shape discussions on the global financial architecture at the G20 summit scheduled to take place in London on 2 April and thus likely to occur before EU leaders have reached a common position.

In the United States, after his meeting with Prime Minister Brown, President Barack Obama revealed little in response to reporters’ questions about the U.S. approach to next month’s G20 meeting. News reports quoting White House officials suggest that while the president is open to some international supervision he does not favor the concept of a global regulator. Officials indicated that the U.S. will press for an examination of international capital requirements for financial institutions and the role of credit rating agencies. The Obama Administration also will continue to champion and advocate for aggressive fiscal stimulus in the major economies around the world.

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