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Central bankers seek ways to reshape financial regulation

Gary Duncan, Economics Editor

Leading central bankers are examining far-reaching measures in the wake of the global financial crisis to reshape the West’s regulatory regime for banks and markets, it emerged at Davos at the weekend.

With the turmoil sparked by the US sub-prime home loans crisis having blown holes in banks’ balance sheets and now threatening a severe world economic downturn, a consensus among central banks’ officials for radical action is being forged.

The scope of proposals being evaluated by officials could amount to the most sweeping overhaul of rules of the world’s financial system for decades and transform the regulatory landscape, policymakers have indicated.

Action will not be immediate while central banks, regulators and governments are still grappling with continued market and economic upheavals, and assessing the causes and consequences. “We won’t know what to do until the dust has settled,” said one source who is closely involved.

Informed officials also dismissed the idea of some new form of global financial supervisory authority with overarching powers. One said bluntly of the concept: “Feasibility - zero.”

In a blow to Gordon Brown and Alistair Darling, there was also scepticism among some officials at Davos over Britain’s call for a new “global early warning system” to flag potential market flashpoints and recommend preemptive action. However, it is clear from a list of measures being considered that the eventual measures will be wide-ranging.

The world’s big banking groups face steps that will greatly alter their incentives and may lead to them being compelled to drastically scale back some activities and simplify some securities and investment structures.

One official source said: “I think we are going to want to change quite a lot of things.” Another said: “Improvements have to be across the board - we have to be holistic.” They said there was no area of the global financial system that could be described as perfect and as needing no change.

Central banks are also clear on the need for improvement in their own operations, including a requirement of greater coordination of their surveillance and policing of institutions, as well as examining the case for new techniques and “policy instruments” to respond to threats and crises. The case for more coordination has been illustrated by the case of the rogue trader in Société Générale, the French bank, who is alleged to have lost it €4.9 billion (£3.7 billion). Observers were shocked to learn that the US Federal Reserve knew nothing of the affair, uncovered last weekend, when it later ordered an emergency three-quarter-point cut in interest rates last Tuesday. The Fed had not been told by the Bank of France or the European Central Bank.

Among changes to oversight and regulation of financial markets and banking being considered, the role of incentives, both those that led US banks to lend billions of dollars in “sub-prime” mortgages to people with poor financial standing and those for banks to maintain adequate capital as a cushion in any crisis, are seen as crucial by senior officials.

Measures to increase transparency over banks’ true financial position are also regarded as vital.

Fuente: Duncan, Gary (2008). “Central Bankers Seek Ways To Reshape Financial Regulation”. The Times Online: World Economic Forum. http://business.timesonline.co.uk/tol/business/economics/wef/article3261586.ece.