Fed’s Dudley:Must Not Backslide On Committment To Intl Reg Rfrm
–Citigroup’s Pandit: Can’t Assure Sys Safety Just Thru High Cap Reqmnt
By Brai Odion-Esene
WASHINGTON (MNI) – While regulatory reform might be moving at
different speeds around the world, the goal must still be to achieve a
level playing field across jurisdictions, as to do otherwise would spark
a “race to the bottom,” New York Federal Reserve President William
Dudley warned Friday.
Implementing regulatory reform around the world is not intended to
spark even greater competition, but to create an environment where the
playing field is level, Dudley said during a discussion at a meeting of
the Bretton Woods Committee’s International Council in Washington.
“We haven’t achieved that level just yet,” he added, “but without a
level playing field, the whole dialogue would shift from worrying about
how to make the financial system more stable to ‘what’s best for my
If the conversation were to shift in that direction, Dudley warned,
what would come next is a race to the bottom.
“So it is very, very important that we establish high standards —
standards that are transparent, that are relatively uniform around the
world,” he said.
The international regulatory community is very committed to this,
and the key is to ensure there is no backsliding from that goal, Dudley
Given the unilateral actions taken by some countries recently in
the face of the slowing economic recovery, Dudley was asked if the
harmonization envisioned by the G20 following the 2008-2009 financial
crisis was gone.
“It is completely appropriate for countries to pick higher
standards than the average across the board,” he said. “I would
distinguish between deviation from appropriate standards upward,” he
added, and “deviation from appropriate standards downward.”
Dudley said it is to be expected that the regulatory reform will
move at a different pace in various countries. But once that legislation
is established, there must be a move to harmonize the regulatory regimes
This is especially important with regard to over-the-counter
derivatives, Dudley said, noting, “It is very important that the
European standards on that and the U.S. rules synch up.”
While implementation of the Dodd-Frank Act by U.S. regulators is
“running ahead” of the European effort, Dudley said, both sides will
make every effort to achieve harmonization at the end.
Speaking at the same event, Citi CEO Vikram Pandit took issue with
the current approach to regulating systemic risk, arguing that any
regulatory framework should include “all participants in the system, not
just formal banks,” to create a level playing field.
And while there has been a strong push to increase the capital held
by banks, in order to lower the future likelihood of a financial crisis,
Pandit warned that “systemic safety cannot be guaranteed solely or even
mostly through high capital requirements on banks.”
“Paradoxically, the higher we set capital requirements for banks,
the more money flows into unregulated or less regulated sectors of the
system, thereby increasing systemic risk,” he added.
Pandit also said this approach focuses on the institutional side
and not enough to the consumer. “More attention needs to be paid to
consumer product regulation,” he said.
Pandit said it makes more sense for regulators to create a
“benchmark” portfolio and require all financial institutions, not just
banks, to measure risk against it.
He said the portfolio would not exist on any balance sheet, but
would be a collection of assets representative of the kinds of assets
that most financial institutions actually hold at the time.
“Knowing how a given company’s risk measurements perform against
the benchmark portfolio tells the world how its management thinks about
risk,” Pandit said, “and therefore just how conservative or risky its
own portfolio probably is.”
As for derivatives, Pandit said they remain “too opaque,” and the
prevalent OTC system cannot be the system of the future.
While clearing houses are better, best would be to create an
exchange network for a good majority of derivatives, he said.
** Market News International Washington Bureau: 202-371-2121 **