Nations warned over financial regulation push
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Emerging Markets

Nations warned over financial regulation push

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The G20’s push for global financial regulatory reform falls far short of what’s needed to avoid a repeat of the crisis, Paul Martin, Canada’s former prime minister and one of the group’s principal founders, warned in an interview with Emerging Markets

Efforts in Seoul by Group of 20 leading economies to push forward a global financial regulatory reform agenda fall far short of what’s needed to avoid a repeat of the global financial crisis, one of the group’s principal founders has warned.

In an interview with Emerging Markets, former Canadian prime minister Paul Martin cautioned leaders not to let tensions over competitive currency devaluations over coming months detract from regulatory reform efforts.

“We must never forget that if there is a problem with currencies today, it was made worse by a downturn that turned into a perfect storm because of the inadequacy of international bank regulation,” Martin said.

“Just because of the currency devaluation concerns, don’t walk away from the central problem that got us into this mess in the first place,” he added, noting that the world has just emerged from a recession that was “in many ways the direct result of the failure of European and American bank regulation.”

Global regulators confirmed at the G20 summit Friday that the world’s biggest banks will be required to hold more capital to make them less susceptible to failure.

But Martin, who helped set up the group in 1999, warned that rubberstamping an accord on bank capital, the so-called Basel III rules, was not enough to prevent a relapse of the crisis – especially if triggered by a major emerging market banks.

“The Chinese have two of the largest banks in the world that will play an increasingly important international role in coming years. But what will happen in 5-10 years when BRIC economy banks are the biggest in the world and they stumble?”

He called on G20 governments to empower the Financial Stability Board (FSB), its financial taskforce, to act as the world’s global regulatory oversight body, with a remit to police banking jurisdictions globally.

He said the FSB has “a very important role to play” in “inciting national regulators to do their job."

“It’s one thing for the G20 to adopt [Basel proposals] but we’ve got to recognize many people will want to use the lengthy transition period to weaken [the accord],” he said. “There’s going to be an enormous pressure over the coming years to get around Basel [rules]. You need a body like a strong FSB to be able to oversee that.”

But he said moves to restrict FSB membership to 24 nations was a “mistake” and should be expanded to the equal the IMF’s 185-nation constituency. The watchdog will never become what US Treasury Secretary Timothy Geithner has said should be a “fourth pillar” of global economic governance if its remains restricted to leading economies, he said.

“The world has to protect itself against another set of bank failures because of inadequate regulation. You need a body that ensures that the minimum standards apply across the board.”

But he added: “The question remains whether the FSB is going to be given the authority that it requires.”

The G20 also said in Seoul that “global systemically important financial institutions” or GSifis – should submit to a process of “mandatory international recovery and resolution planning.” Such institutions should also be required to hold larger reserves than smaller banks.

While agreeing that the moves were a step in the right direction, Martin called on nations to redouble efforts to craft universal rules for dealing with insolvency at systemically important – or “too big to fail” – banks.

“It is absolutely crucial that we complete the process of regulatory bank reform. ‘Too big to fail’ has not been dealt with by Basel nor by the G20 now,” Martin said.

“There’s no excuse that the too big to fail debate has been going on for this long. Central bankers and regulators have been discussing it ad nauseam for two years. But the leaders have got to set the direction, to say they’re fed up with the stalling and they want to see this resolved.”

He said leaders needed to tell regulators that “we’re not going to be nickled and dimed to death on this.”

The FSB said in Seoul Friday that the process of picking out the roughly 20 GSifis and subjecting them to tighter regulation will take until the end of next year.

“The FSB will review how to extend the framework to cover a wider group of Sifis, including financial market infrastructures, insurance companies and other non-bank financial institutions,” the body noted.

Despite what he saw as insufficient progress on financial regulation, Martin said the value of G20 summit lies less in “building up magical solutions” but in the fact that “over a series of meetings we will make far more progress in making globalisation work than we ever would had it not been created.”

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