–Must Balance Consistency On Global Reform W/ National Flexibility
Brai Odion-Esene
WASHINGTON (MNI) – Although adopting a strong, common set of
capital and liquidity rules for internationally active banks is
critical, “it is neither practical nor desirable to negotiate all
details of financial regulation internationally,” Federal Reserve Gov.
David Tarullo said Tuesday.
In testimony prepared for a hearing regarding international
coordination of financial regulation by a Senate Banking subcommittee,
Tarullo stressed the importance of the United States preserving the
flexibility to adopt prudential regulations that work best within the
U.S. financial and legal systems.
“Within a common set of agreed-upon global standards, each
jurisdiction will want to tailor some of its rules and supervisory
practice to national conditions and preferences,” he said.
The job of U.S. regulators, Tarullo said, must be to ensure that,
together, the various international financial organizations produce
reforms and practices that are consistent with U.S. interests and legal
requirements.
Tarullo laid out what he believes should be U.S. goals for
international cooperative efforts including; increasing the stability of
the financial system through adoption of strong, common regulatory
standards for large financial firms and important financial markets; and
working to prevent major competitive imbalances between U.S. and foreign
financial institutions.
The Fed official also repeated the Fed’s stance on capital
requirements, with the central bank’s view that large institutions
should be sufficiently capitalized so that they could sustain the losses
associated with a systemic problem and remain sufficiently capitalized
to continue functioning effectively as financial intermediaries.
“Meeting this standard will require a considerable strengthening of
existing requirements, both with respect to the amount of capital held
and to the quality of that capital,” Tarullo said.
Going on to comment on the recently passed financial regulatory
reform bill, Tarullo told the subcommittee that there are aspects of the
Dodd-Frank Act that are unlikely to become part of the international
regulatory framework.
In particular, he said the Volcker rule — that generally bans
banks operating in the U.S. from engaging in proprietary trading or
certain derivatives transactions — or the limits placed on banks’ size,
are unlikely to be adopted by many countries with concentrated banking
systems.
With regard to the Volcker rule, Tarullo said “many other
countries follow a universal banking model and are unlikely to adopt the
sorts of activity restrictions contained in the act.”
Tarullo acknowledged that not all elements of financial reform can
be designed on a national level in a way that is perfectly consistent
across countries.
“Our challenge,” he said, “is to strike the right balance between
achieving global consistency on the core reforms necessary to protect
financial stability and provide a workably level playing field, and at
the same time providing the flexibility necessary to supplement the
common standards with elements tailored to national financial systems,
legal structures, and policy preferences.”
The difficulty in implementing international financial regulation
uniformly can also been seen in discussions on cross-border resolution
of failing financial institutions, with Tarullo cautioning that despite
the progress being made through efforts by the Financial Stability Board
and domestic agencies, “comprehensive solutions to cross-border crisis
management difficulties will not be easy to achieve.”
At least for the foreseeable future, he continued, “a focus on
regulatory coordination and supervisory cooperation and planning before
a large firms failure becomes a real possibility is likely to yield the
greatest benefit.”
A difference of opinion between U.S. regulators and their European
counterparts can also be seen in the approaches towards addressing the
risk posed by compensation practices.
Tarullo noted that the European Parliament in July approved a
directive that has the potential to lead to a number of formula-based
restrictions on employee compensation at financial services firms
operating in the EU, the Fed does not believe that will be an effective
strategty.
“Our view continues to be that a uniform or formulaic approach to
all such employees would be neither efficient in motivating and
compensating employees nor effective in preventing excessively risky
activity, particularly among non-executives such as traders,” Tarullo
said.
** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MI$$$$,M$$CR$,MK$$$$]
