Radical Reform Recommended for Both EU and U.S. Financial Sectors--Part III

The flow of substantive input regarding the global financial architecture continues. While the recommended actions differ, most commentators concur that action is urgent and reform should be sweeping.

On 15 January, the Group of 30, chaired by Paul A. Volcker and comprised of leading policy-makers and business leaders from across the globe, issued the Framework for Financial Stability—a set of 18 recommendations for financial reform, including that:

  • “In all countries, the activities of government-insured deposit-taking institutions should be subject to prudential regulation and supervision by a single regulator (that is, consolidated supervision).”
  • “Gaps and weaknesses in the coverage of prudential regulation and supervision must be eliminated. All systemically significant financial institutions, regardless of type, must be subject to an appropriate degree of prudential oversight.”
  • “In general, government-insured deposit-taking institutions should not be owned and controlled by unregulated non-financial organizations, and strict limits should be imposed on dealings among such banking institutions and partial non-bank owners.”

Adair Turner, Chairman of the UK’s Financial Services Authority (FSA), commented on and reinforced these proposals at a speech on 21 January. Before delivering an outline of recommendations for financial reform, which will be closely analyzed in other EU capitals and by the EU institutions, Turner summarized the flaws of the current system and their consequences:

“The far bigger failure—shared by bankers, regulators, central banks, finance ministers and academics across the world—was the failure to identify that the whole system was fraught with market wide, systemic risk. We failed to realize that there was an increase in total system risk to which financial regulators overall— authorities, and central banks and in fiscal authorities—needed to respond.”

The FSA will put forward a set of proposals in March for modified rules that, it would seem, will involve broad and sweeping changes. The FSA’s upcoming proposals will have to be measured against the over-riding proposals for new EU rules that are expected to be published around the same time.

With regard to the EU, the Organization for Economic Cooperation and Development Secretary-General Angel Gurría on 14 January called for “a more centralized and integrated supervision of Euro area banks and financial markets to help prevent a recurrence of the financial turmoil which triggered the current recession.” Gurría said policy-makers should “create either a single EU-wide supervisor or a central agency to work in conjunction with national supervisors.”

Views like those expressed by Gurría are not new but have until recently been at the fringe of the debate. They came up again on 21 January in the European Parliament when European Central Bank chief Jean-Claude Trichet responded to questions and confirmed his view that the EU Treaty contains provisions that can be activated to give the ECB supervisory tasks. Such a development would mean a significant step forward in terms of granting new, federal, powers to the ECB. It would also sidestep those calling for the creation of an independent agency or expressing concerns that the ECB already is too powerful and lacks accountability. A new, fully independent, EU supervisory authority may require preceding amendments to the EU Treaties, an almost unmanageable task.

In the United States, President Obama and his administration continue to work on the details of their financial regulatory reform plan. White House Chief of Staff Rahm Emanuel acknowledged that the president has read the Group of 30 report and agrees with its “basic thrust.” Treasury Secretary-designate Tim Geithner told Senators at his nomination hearing, “I know the president wants to come to the Congress quite quickly and lay out a framework of recommendations for reforms.”

The General Accountability Office, the U.S. congressional oversight agency, released its biennial High Risk Series report on 22 January and lists “Modernizing the Outdated U.S. Financial Regulatory System” as the top new “high-risk” to the country. The GAO asserts that the cost of the federal response to the “current financial turmoil” is “estimated to be in the trillions of dollars” and calls for increased near-term oversight and long-term regulatory modernization. The report may very well cause the Obama Administration to quicken the pace of its reform plans.

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