G-30 speaks out on structure of financial supervision

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NEW YORK – The Group of Thirty, a non-profit international body composed of central bank governors, leading economists and private financial sector experts, has published a new, and timely, report that analyses the existing structure of financial supervision in 17 jurisdictions.

The report, The structure of financial supervision: Approaches and challenges in a global marketplace, was introduced at a press conference in New York on the eve of the meeting of G-7 finance ministers and central bank governors in Washington, DC. Paul Volcker, chairman of the Group of Thirty’s board of trustees, said: “The financial turmoil that has unfolded over the past year has tested the ability of regulatory authorities to respond effectively to financial crises. It is evident a number of countries need to revise and reform financial regulatory structures.”

From analysis of the financial supervisory systems in 17 jurisdictions around the world, the report identifies a taxonomy of four regulatory structures: the institutional approach, the functional approach, the integrated approach and the ‘twin peaks’ approach. It notes the US is an exception due to its numerous federal and state authorities. The G-30 report was compiled from publicly available information, and through interviews with regulators and supervisors in each of the jurisdictions. It is hoped the report will be used as a fact base by regulators and politicians embarking on reforming their financial regulatory systems.

Roger Ferguson, president and chief executive officer of TIAA-CREF, former vice-chairman of the US Federal Reserve Board and the vice-chairman of the G-30 working group, said: “The analysis of current practices across 17 jurisdictions reveals the advantages and shortcomings in many systems and provides context for recent events in the global markets. No one model has proven unambiguously superior in achieving all the objectives of regulation. And all policymakers and regulators interviewed emphasised the critical importance of having regulatory frameworks to accommodate and keep pace with rapidly changing financial markets. This is underscored by the restructuring of banking institutions that we are now witnessing.”

Jacob Frenkel, chairman of the Group of Thirty, vice-chairman of AIG and former governor of the Bank of Israel, said: “The urgency of regulatory reform is that weaknesses and vulnerabilities in the financial system have been exposed that need fixing; battered public confidence in the health of the financial system needs to be addressed in a decisive manner; and actions taken that might better anticipate further possible challenges to the financial sector resulting from today’s prevailing economic conditions.”

Frenkel stressed the problems in the financial system are highly contagious. The fact that recent disruption in the collateralised debt obligation market due to subprime mortgage issues had a wide impact internationally, for example, provides ample illustration of this exposure. “The market turmoil we have witnessed over the past year has necessitated unprecedented interventions by governments and central banks all over the world to reduce the impact of future disturbances. The G-30 report is evidence of the growing recognition that a reassessment of the effectiveness of regulatory approaches is required,” he said.

The report stressed the need for greater international co-operation and co-ordination in reforming the global financial structure. Volcker emphasised that the international standards developed for accounting and capital adequacy could be used as a template for this, however, he did acknowledge that those specific examples, specifically in the case of Basel II, took almost a decade to structure, while today changes are happening much faster in response to the market turmoil. “Basel II took 10 years or more to get under way, and now changes happen in 10 days,” he said, adding that, although this report does not attempt to answer these questions, “it is something that has to be resolved and be part of the overall pattern of rebuilding a financial system that is sturdy and stable, but nonetheless has enough flexibility to innovate and advance”.

The report also emphasised the importance of having an effective, transparent and efficient deposit-protection scheme as a part of the financial regulatory architecture – a factor brought into even sharper relief considering the wrangling in the EU over this issue at the moment.

The G-30 intends this report to be part one of a series of reports on financial regulation, with recommendations potentially being published in a second report in a few months.