Financial regulators planning worldwide rules for large firms
Sunday, October 10, 2010; 9:09 PM
International bank regulators are planning a fresh wave of rules for the world's most important financial companies in an effort to ensure that firms considered "too big to fail" are better protected from collapse - and that taxpayers are insulated from the fallout if they do.
The new regulations could include demands that such firms - referred to by regulators as "systemically important financial institutions" - keep more capital on hand than other banks and companies, draft detailed "living wills" to outline how they could be eased into bankruptcy without damaging the larger economy, and be subject to more intense government supervision.
While many of the details are still to be worked out, the head of the effort said a general set of 16 recommendations will be presented at a gathering of world leaders next month in Seoul.
The companies in question "are very big and powerful," said Mario Draghi, head of the central bank of Italy and chairman of the Financial Stability Board, the international panel working on the new regulations. "There needs to be supervision at the global level. You need supervision up to the challenge."
The aim, Draghi said, is to create a system where it is less likely for globally important firms to get into trouble. In addition, they want a system where they can be allowed to go out of business, like any other firm, without pressure building for a bailout by taxpayers.
Regulation of the world's most important financial firms is one of the central questions regulators have been grappling with in the wake of the recent financial crisis. As the crisis unfolded in 2007 and 2008, it became clear that some companies are so intertwined with the global system that their failure would have unacceptably destructive consequences. That realization drove the rescue of companies like insurance giant American International Group, as well as efforts to prop up major banks throughout the world.
The need for those bailouts is considered a significant regulatory failure - a situation allowed to continue where losses that should have remained private were socialized onto public balance sheets.
Draghi, interviewed on the sidelines of the International Monetary Fund meeting in Washington, would not speculate about how many or which companies around the world might fall under the new rules. Part of the work left to do, he said, is to create guidelines for determining which banks, insurance companies or other firms ought to be subject to the tougher standards.
The new requirements will be imposed on top of the tougher bank capital requirements recently proposed by a panel of central bank governors working out of Basel, Switzerland, and also in addition to any new national regulations that may be approved in the United States and other economic powers.
On Sunday, a group of financial industry leaders said they worried that the successive waves of regulation will have unintended consequences - and particularly that they could be a drag on economic growth. Leaders of the Institute of International Finance said they agree regulators should look for ways to guard against broad risks to the financial system, and should pay attention to the role played by the most "interconnected" companies.
But the requirements already pending will force major banks to raise more capital and lend more conservatively, the group said, cautioning regulators against piling on too much more.
"We need to avoid a process where requirements on banks keep growing," said Josef Ackermann, chairman of the IIF and head of Deutsche Bank.
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