An increasingly fragmented approach to global financial policy and regulation poses a threat to the international financial system and risks undermining the global economic recovery, banking industry leaders warned on Friday.
“We are seeing actions by national authorities to develop their own regulatory approaches, or to add to, or modify the Basel capital agreements,” Deutsche Bank chief executive Josef Ackermann said at a meeting of the Institute of International Finance (IIF) in Delhi. “This poses the risk of fragmenting the global financial system.”
Ackermann, who is also IIF chairman, called on G20 leaders to agree on a clear and coordinated approach to financial regulation or face “significant economic costs.”
He stressed that the IIF was not opposed in principle to banking sector regulation, but he warned that both existing Basel III requirements and additional measures – including moves by a number of countries to shore up reserve requirements for domestic banks –would deprive banks of the liquidity that would support the credit needed to sustain the global economic recovery.
Phillip Suttle, the IIF’s chief economist, said that the lack of a globally coordinated approach to financial regulation could undermine growth at a time when inflation is on the rise.
“The evidence is already coming in that the move towards restrictions in the financial sector is holding back growth,” he told Emerging Markets.
“There is a risk, especially in the mature economies, that we end up with an environment where we get continuous growth disappointments and surprisingly high inflation,” he added, stopping short of describing the scenario as ‘stagflation’
Suttle also criticised the implementation of capital controls by a number of emerging market economies, suggesting that they amounted to “ineffective barriers to stop the inevitable” – namely, currency appreciation.
Roberto Setubal, CEO of Brazilian bank Itaú Unibanco and vice-chairman of the IIF, told Emerging Markets that although he was also strongly opposed in principle to capital controls, he recognized that “for the moment, some countries might need to impose some measures to manage excess inflows of capital given the current global economic conditions.”
But in a separate address, Jose Angel Gurria, Secretary General of the Organization for Economic Cooperation and Development (OECD), suggested that the IIF may be disappointed in its calls for greater regulatory coordination and an end to other unilateral policy measures.
“Banks are a very good villain, so maybe we’ll have a period where we do have too much regulation as a political result [of the crisis], but eventually we’ll get it right,” he told delegates in Delhi.
The official message at the IIF’s three-day meeting was one of cautious optimism about the sustainability of the global recovery, led by emerging economies.
But this was tempered by concerns over inflation and the potential for a further oil price shock in the wake of ongoing unrest in North Africa and the Middle East. Many delegates expressed serious concerns behind the scenes about the possible impact of oil prices on the global economy and on emerging markets in particular.