Large banks could be restricted from risky prop trading for their own good, suggests a Group of Thirty (G-30) report issued today.
The report was issued by the G-30, an association of private and central bankers. Systemically important banks (based on size, interconnectedness, leverage and the provision of critical services) should be especially closely regulated - and continuing mergers in the US in particular meant that the financial market was growing increasingly dependent on a small number of huge bank holding companies. Given their importance, they should face restrictions on their involvement in prop trading, hedge fund sponsorship, origination and distribution of structured credit products, and credit default swaps, the report said.
Supervision should be tightened on non-bank financial institutions and hedge funds, and money market funds should be required to reorganise as banks. The report also criticised public/private hybrids such as the government-sponsored US mortgage lenders, and called for more formalised international collaboration between regulators.
The G-30 refused to identify a single regulatory model as the ideal, but called on national authorities to ensure there were no gaps in their regulatory coverage - a criticism that will carry force in the US in particular, where the aftermath of the Bernie Madoff case is revealing the lack of co-ordination between the country's many financial regulators.
The report also called for central banks to take responsibility for financial stability, rather than simply targeting inflation. It criticised the overuse of mark-to-market accounting, which it described as a "forced fit" with a model intended to handle only liquid instruments, and said that compensation policies should be revised to prevent 'short-term' attitudes.
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