Stronger together

Nick Sawyer

Many risk managers have expressed concern about the apparently independent actions taken by supervisors in different parts of the world to combat the financial crisis. Regulators have repeatedly acted alone in trying to eliminate flaws in the risk management of their financial institutions, as witnessed in the ways various governments acted to bail out their leading banks last year.

At first glance, the regulators share common goals. All agree capital needs to be strengthened, with a particular focus on raising trading book capital and the introduction of leverage ratios and capital buffers, while most see eye to eye on the need for some form of systemic regulator.

In fact, rules proposed by one supervisor have often been quickly picked up by another. Just think central clearing of credit default swaps, an initiative first driven by the Federal Reserve Bank of New York and duplicated by the European Commission (EC). More recently, the US Treasury announced plans to introduce a 5% retention charge for securitisation originators on June 17, a plan first devised by the EC.

Nonetheless, there are frequent variations in the regulations. Focusing just on the concept of a leverage ratio, there are different opinions on whether the measure should include off-balance-sheet exposures and whether derivatives should be measured on a net or gross basis. Both issues could create substantial differences in the leverage ratios used by different jurisdictions, making comparison impossible.

In some cases, replicating rules already imposed by one regulator is considered pointless. For instance, many have criticised the EC's decision to mandate clearing of European credit default swaps trades through a European central counterparty, noting multiple clearing houses may actually reduce efficiency and lead to an increase in counterparty exposures.

Even plans for a systemic regulator - which would presumably need close co-operation between supervisors across different regions and sectors - has been rolled out in multiple forms, with the US and Europe both launching their own versions.

While regulators on either side of the Atlantic have been criticised for going their own way, the EC is considering cracking down on European national regulators that modify guidelines to suit their own markets. A proposal to eliminate options and discretions for national regulators in Europe may be published as soon as October, and is likely to be hotly contested by domestic supervisors. It's wrong to think a similar ban on opt-outs could work on a global basis - for instance, to ensure a level playing field in global accords such as Basel II. But the least that should be expected is very close co-operation between national supervisors - something regulators say they are doing. The occasional release from individual regulators that seems out of step with others suggests it could be closer.

Nick Sawyer, Editor.

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