Body to Monitor World Banking Among Proposals
By Anthony Faiola and Glenn Kessler
Washington Post Staff Writers
Friday, November 14, 2008
Nations are close to adopting a series of measures aimed at combating a global recession and laying the groundwork for a broad reconstruction of the international financial system, as world leaders arrive in Washington for a major economic summit this weekend.
Among the most notable measures would be a new body to supervise the regulation of global financial institutions. The "college of supervisors" would bring together international regulators to coordinate oversight of the world's 30 largest financial institutions, according to officials familiar with the plans. The new body would be designed to add an extra level of scrutiny to the way banks are monitored and to catch excessive risk-taking of the sort that contributed to the current economic crisis.
The United States, European countries, Japan and major developing nations are also close to a deal to create an "early warning system" to detect weaknesses in the global financial system before they reach epic proportions, according to diplomatic sources, who spoke on the condition of anonymity because plans were still being worked out.
Meanwhile, with international calls for greater transparency growing, U.S. officials say the Federal Reserve will soon announce the creation of a clearinghouse system to help standardize and limit risk on some of the opaque and exotic financial derivatives that helped bring down Wall Street's investment banks. Even five of the world's wealthiest hedge-fund managers said yesterday that they would support oversight of their industry.
Disagreements remain over the scope and speed of what needs to be done amid the worst financial crisis in decades. The discussions, though, are playing out as evidence mounts that the global economy is plunging even deeper.
Yesterday, Germany became the latest country to fall into recession since the onset of the crisis. The World Bank and the Organization for Economic Cooperation and Development now predict that the developed world overall will contract next year; even in red-hot developing countries such as China and India, growth is projected to slow.
Several of the world leaders arriving in Washington today have blamed the United States for causing the crisis by failing to adequately regulate markets and allowing freewheeling lending. As a result, the United States will face some sense of rebuke at the Group of 20 summit.
President Bush yesterday defended American-style capitalism and warned against overregulation or any efforts "to reinvent" the system. Yet after eight years of deregulation and the expansion of market freedoms, he also called for reforms and greater cooperation among the world's financial authorities.
Broader reforms are needed "to strengthen the global economy over the long term," Bush said in a speech in New York. "This weekend, leaders will establish principles for adapting our financial systems to the realities of the 21st-century marketplace."
To jump-start the global economy, leaders are pushing a series of shorter-term actions. On the heels of similar announcements in Japan, China and Germany, British Prime Minister Gordon Brown is set to unveil a major stimulus package as early as next week. Before heading to Washington, he argued yesterday that nations should also coordinate monetary policy.
After approving billions of dollars in tax rebates this year, Bush has resisted a new surge in federal spending to stimulate the U.S. economy. He is expected to be pressed by several leaders to reconsider this weekend, with some arguing the situation is now so acute that the world cannot wait for the Obama administration to usher in a plan.
"A certain fiscal stimulus is needed," said Arkady Dvorkovich, chief economic adviser to Russian President Dmitry Medvedev. "We need to know we are not the only one to ease fiscal policies. If all countries will agree that it is needed, and each particular country will announce it will do it, then it will be beneficial to everyone."
Negotiations over what steps to adopt have been taking place through dozens of meetings and phone conversations between economic officials from leading countries and international financial organizations, diplomats said. While short-term issues such as stimulus proposals are being discussed, the summit appears largely to be focused on broad ideas to change the world's financial architecture.
World leaders are expected to set up working groups to wrangle over the details and to plan a follow-up summit for late March, after Barack Obama takes office. Among the areas of focus, according to diplomatic sources, are increased transparency and cooperation in global finance and regulation and an expansion of the role of the International Monetary Fund.
Though some leaders, particularly French President Nicholas Sarkozy, have called for a new era of "global regulation," there appears to be little support for a new international body that would issue edicts on how countries should regulate their own financial systems. "The French may be pushing that agenda of a single global regulator," said a Canadian diplomatic source. "But pretty much nobody else is."
Diplomats are, however, pressing for the adoption of guidelines on executive pay at financial institutions to ensure that compensation packages don't encourage excessive risk. They are also focusing on harmonizing regulation and creating international standards for accounting and bank liquidity.
Some officials have advocated beefing up the Financial Stability Forum, a little-known body in Switzerland. Created in the wake of the Asian financial crisis in the late 1990s, the organization has no dedicated budget and only a handful of staff members. But it remains the only global body that periodically brings together regulators, as well as finance ministers and central bankers from leading countries, making it a juicy target for expanding its mission.
One major obstacle to such a plan: The forum is largely viewed as a club of rich nations, with almost no representation from the emerging giants such as China and Brazil, countries that most diplomats now agree must have a larger say in any remake of the financial system. Several of those countries, however, are now in talks to join the organization, according to diplomatic sources in Europe and Latin America.
The new college of supervisors, an idea that faced initial resistance from Washington when it was proposed by British officials months ago, would have its seat at the Financial Stability Forum. International regulators could compare notes on bank liquidity and risk, coordinating regulation of major global financial institutions.
"You have a big multinational financial institution operating in seven or eight economies around the world, then you gather together the supervisors from each of those, and you have them take a look at the company's activities around the globe so that you don't get this fragmented picture of a business's operations," said a senior British government official.
For more than a year, the forum has functioned as a repository for reports that have warned of the dangers to the financial system posed by the subprime mortgage crisis, as well as by the securities and derivatives tied to them. Officials believe the forum, along with the IMF, could now play a key part of in the creation of a financial early warning system.
Some world leaders are seeking to remold the global financial institutions established shortly after World War II -- the IMF and World Bank.
The IMF, the Washington-based multilateral lender, was originally conceived to stabilize exchange rates. Since the 1970s, however, the fund has become more of a financial firefighter, offering loans mostly to developing countries in fiscal crisis while insisting on strict adherence to free-market principles. In recent years, with much of the world prospering, the IMF had become largely relegated to the role of economic gadfly and adviser to poor and middle-income nations.
The current crisis has seen it spring into action again, bailing out a growing list of nations including Iceland, Ukraine and Hungary.
Though the IMF has lent only a small part of its $250 billion war chest, that sum is now viewed as far too meager to cope with the current crisis.
Experts predict it may need $1 trillion or more, with Brown calling on China and the Persian Gulf nations to offer up some of their vast reserves. Japan last night said it would offer as much as $100 billion to the IMF to aid countries in crisis. But some nations are pressing for change in the structure of the IMF board, which today gives small European countries such as Belgium larger voting rights than China.
With the outbreak of the current crisis, the IMF may also be pushed to intensify its monitoring of wealthy countries. To date, for instance, the United States has refused to be part of an IMF program that conducts intensive reviews of national financial systems. There are calls now to make such reviews mandatory.
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