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For the past 5 years, bankers have become used to hearing politicians tell them that credit is good for everyone, that regulations get in the way of banking innovation, that banks are best left to regulate themselves, that rules are not needed and that guidance alone will do. Now their words are coming back to haunt them.
In 2004, Gordon Brown, the British Socialist Prime Minister told a City audience "in budget after budget I want us to do even more to encourage the risk takers". In 2007, he addressed the Confederation of British Industry informing them that, on banking regulation, there would be “no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch.” One would be surprised to hear these words today.
In October 2002, US President George Bush told a conference on minority home ownership that “we want everybody in America to own their own home” and he created the American Dream Down Payment Fund to provide financial grants to local governments to help first-time home buyers make the down payment on homes. Bush promised to make things less regulated and to do away with the “small print”. Unsurprisingly a sub-prime crisis ensued. In 2003, Bush also vetoed any increase in the budgets of the US financial supervisor, the Securities and Exchange Commission and committed his government to reducing the costs of regulation in financial markets. SEC general counsel, David Becker, was so incensed he resigned on the spot.
These policies have cost the UK and US governments alone around a trillion dollars – and that excludes other countries contributions and the general loss felt by all who have pensions, savings or investments. Now governments want to turn the clock back. So what are we likely to see?
The strengthening of the IMF’s powers to support markets seems likely and, in order to have the financial capacity, this will go hand in hand with the enlargement of the G-8 to include, at a minimum, the emerging financial powers of China, India, Saudi and the UAE, Brazil and Russia. Basel II will evolve with capital requirements tied to countercyclical measures, liquidity risk and, probably, adjustment factors for incentive and management risk (the increase in risk derived from bonus schemes and poor management). Other measures could include a global regulatory forum, a transaction “tax” designed to create a global capital buffer, and restrictions on certain types of derivatives and traded practices (Credit Default Swaps and naked short selling being candidates for this).
Over the next weeks, Chase Cooper News will attempt to forecast the expected changed to the risk management landscape.
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