05 Mar 2009, David Benyon, Operational Risk & Regulation
The 194-page report, entitled 'Macroeconomic Stability and Financial Regulation: Key Issues for the G20', is published by think tanks the Centre for Economic Policy Research and VOX EU.
The study says the nations need to act quickly and together to restore stability and stimulate economic growth. "As the financial crisis deepens the temptations for each individual country to free-ride increase and the need for co-ordination becomes more evident," says the paper.
The report recommends the elimination of pro-cyclical elements of Basel II constraining banks into lessening lending as the economy slides into recession, by using a multiplier based on macroeconomic conditions.
A centralised clearing counterparty for credit default swaps is also recommended. This is an echo of calls by the European Commission and is another stone thrown against over-the-counter financial products blamed for a lack of transparency and increased counterparty risks.
Another recommendation is for the removal of the 'issuer pays' model for credit rating agencies, which regulators have also widely criticised as a contributor to conflicts of interest in the rating of structured products. Furthermore, the report calls for CRAs to be hardwired into the regulatory system to provide a benchmark for regulators.
A harmonised bankruptcy regime is also recommended to give supervisors increased intervention powers over banks before they become technically insolvent. This would be in line with the US system for 'prompt corrective action' in addition to new UK rules contained in the Special Resolution Regime.
The report is the result of a seminar with the G-20 deputies held on January 31 and hosted by the UK Treasury and the Bank of England, in addition to consulting academics and private-sector participants as well as the officials.
The proposal can be downloaded here: http://www.voxeu.org/reports/G20_ebook.pdf