Global regulators set out their ambitions to impose tough
banking reforms in Istanbul yesterday, in response to fears
that a lack of political will to dethrone giant, unwieldy banks
could sow the seeds of another crisis.
The head of a key US regulator argued for weakening the
protection enjoyed by holders of secured instruments issued by
systemically important banks, while the chief
regulator for the G20 said that the largest institutions should
face the toughest measures.
Sheila Bair, head of the US Federal Deposit Insurance
Corporation, urged at an International Institute of Finance
seminar that the claims of secured creditors of US banks be
limited to 80% in the event of bankruptcy.
This would reduce the risk of moral hazard of
systemically important institutions deemed too big to fail, as
it would ensure that market participants always have skin
in the game, she said.
Bair also called for a contingency fund for bankrupt banks,
to finance their daily operations and working capital while
bankruptcy claims are being negotiated. This would help avoid a
repeat of the calamity that ensued after the collapse of Lehman
Mario Draghi, chairman of the Financial Stability Board,
asked at a press briefing whether the G20 countries should
enforce the limitation of bank creditors claims, told
Emerging Markets that this one option should be
considered in addition to higher capital charges
and other such measures.
Draghis views are crucial, as he is chairman of an
expanded regulatory body recently set up by the G20 to propose
measures in the next 12 months on how to remove systemic risks
in the banking sector.
He said the FSB would tailor regulations based on the
specific systemic risk each institution poses. You have
very large financial institutions that are not systemically
important, because they are built on a network of subsidiaries,
each one with their own liquidity and capital policies, or you
have the small institutions that are very important from a
systemic view point because they are at the centre of complex
web of credit default swaps and derivative trading, he
His comments came amid accusations that regulatory reform
has lost steam. This weekend, IMF managing director Dominique
Strauss-Kahn, said complacency had set in among
policy-makers amid signs of global economic recovery.
Raghuram Rajan, professor of economics at the University of
Chicago, told Emerging Markets that the momentum for
bold regulatory action on the global and domestic level had
been lost. This crisis is costly but not costly
enough to arouse politicians out of their slumber, he
Lorenzo Bini Smaghi, an ECB governor, blamed this on
political pressure. The regulations were not used [in the
run up to the global crisis] Why? Because no-one wanted the
regulations to be used, he said in Istanbul
We need more independent regulators independent
from politicians. But I see no evidence of this
There has been competition to the bottom ... between
US and Europe to grow their financial industries. This
had undermined the political will to launch bold reforms,
William Rhodes, senior vice chairman of Citigroup warned:
If we dont do regulatory reform now, it will be too
Malcolm Knight, vice-chairman at Deutsche Bank, suggested
the problems of moral hazard continue to rage amid a resumption
of risky banking activities by government-backed
Any institution that makes profits on proprietary
trading on taxpayers money and then distributes the profit in
the form of bonuses that is a moral hazard, he
The belief in the too big to fail concept
has been reinforced by the events of last year, and we need a
resolution regime for resolving failed banks without imposing
costs to taxpayers, said Bair.
ECB governor Smaghi argued that sweeping changes were needed
to integrate the shadow banking system, as well as limit the
risk of regulatory arbitrage.