World financial reform agenda falters
Monday, October 4, 2010; 8:17 PM
Two years after investment bank Lehman Brothers collapsed and the financial system faltered, world leaders are deadlocked over key proposals for ensuring that such a crisis doesn't happen again, and concern is spreading that the chance for common action has waned.
Officials at agencies such as the International Monetary Fund and World Bank say they're worried about the loss of momentum, and private analysts are warning that narrow national interests could undermine further reform.
There is increasing tension over currency rates and a growing expectation that the world's major financial centers each will impose substantially different rules on financial firms - a scenario that senior finance officials such as Treasury Secretary Timothy F. Geithner have hoped to avoid.
In passing legislation this summer to overhaul financial regulation, Congress addressed some of the threats facing the economy. But other countries are poised to move in different directions. Banks in New York, for instance, could be subjected to different fees, taxes and requirements than those in London, Frankfurt or Zurich.
"Urgent action is needed to arrest the disturbing trend towards unilateral moves," Charles H. Dallara, managing director of the Institute of International Finance, wrote in a letter this week to top IMF officials.
The IIF represents the world's major financial firms. At a Monday news conference, Dallara said that growing parochialism among nations was sapping confidence in the strength and durability of the economic recovery.
At the IMF, meanwhile, top officials say they are concerned that the overhaul of global financial rules has stopped short of what is needed to best insulate the world from a repeat of the recent crisis that threw major economies into recession, undercut global trade, and left the developed world saddled with record levels of debt and the prospect of sustained high unemployment.
"The more we continue with the present system, the more likely we are to have a relapse," said Jos Vials, the IMF's financial counselor and head of its capital markets department. "Unless we deal with these problems, we will not have a safer system."
Vials and Dallara, among others, are worried that if national policies are not coordinated, capital will gravitate to where it is most loosely regulated and the risk of another crisis will increase.
Underscoring the concerns, Switzerland announced Monday it would enact capital rules far beyond those expected in other countries, while Brazil said it would double the tax imposed on some forms of foreign investment.
The cautionary statements come ahead of IMF meetings this week likely to be dominated by discussion of whether the reform of global financial rules has gone as far as politics allows.
Leaders of the world's top economies pledged in the wake of the Lehman Brothers collapse to work together to make the global financial system less prone to booms and busts. Leaders did reach agreements on an array of subjects, such as increasing the amount of cash and highly liquid assets banks must set aside as a cushion against losses. These are changes that many analysts agree will make banks better able to survive a downturn in the future.