The Wall Street Journal-20080130-The Fallout at Societe Generale- Europe-s Big Four Seek Global Financial Rules
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The Fallout at Societe Generale: Europe's Big Four Seek Global Financial Rules
Full Text (948 words)LONDON -- The leaders of Europe's four largest economies agreed to push for a tougher, more-global way of regulating the world's markets and banks.
Led by British Prime Minister Gordon Brown, the leaders are banking that, by joining together, they will be able to convince the U.S. and others to sign up.
They plan to use their agreement reached yesterday on a list of principles and objectives to strong-arm banks to promptly disclose their full losses and credit-ratings agencies to provide better explanations of complex securities. In the long term, they want to beef up the power of the International Monetary Fund and the Switzerland-based Financial Stability Forum so they can serve as global watchdogs, according to the directive issued at the end of the three-hour summit.
They will pitch their idea at the meeting of the finance ministers of the Group of Eight leading industrialized nations next month in Japan. Already, officials from the U.S. and United Kingdom have been "constantly" in discussions about global regulatory issues, a spokesman for Mr. Brown said.
"We believe that we can persuade the whole international community of the need for the reforms that we propose," Mr. Brown said yesterday.
The leaders faulted market participants, including banks that keep complex securities off their balance sheets and credit-ratings agencies that signed off on their investments. Europe has been caught by surprise by a financial crisis that began with problems with U.S. subprime mortgages and spread globally.
Yesterday's meeting, which Mr. Brown called last year but which took on greater urgency as the market turmoil continued, is part of a broader regulatory drive gathering momentum. The European Union's top markets official, Charlie McCreevy, plans to propose changes to Basel II, a globally agreed set of rules to ensure that banks have set aside enough capital to cover risks on their books; the rules are in place in Europe and set to be adopted in the U.S. next year, said David Wright, a deputy director general of the commission. The credit crunch prompted a review of the Basel II rules as banks announced big write- downs on risky investments held off their books.
The amendments will look at issues such as a bank's liquidity or the cash a bank holds to run its day-to-day business, Mr. Wright said. The proposed changes could also strengthen the requirement to provide information to supervisors of a bank's branches.
For Mr. Brown, the meeting was a chance to use London's position as a global financial hub to push an idea discussed by his government for the IMF to play a greater role. Central to his plan and the one given a nod by his European counterparts yesterday is the overhaul of the International Monetary Fund. Mr. Brown sees the institution as ideally placed but not structured to take the lead, along with the Financial Stability Forum, which brings together representatives of central banks, regulators and treasury departments, to act as an early warning for the global financial system and coordinate a response when it buckles.
In the U.S., the Federal Reserve has proposed rules to curtail potentially abusive lending practices, while the House of Representatives has passed a bill to prohibit certain lending practices. The Europeans have taken an early lead in regulatory reform and are looking at far broader solutions.
Mr. Brown hosted Germany's Angela Merkel, France's Nicolas Sarkozy and Italy's Romano Prodi as well as Jose Manuel Barroso, the European Commission president.
Both Britain and France go into the global regulatory debate hobbled by banking scandals at home. The U.K.'s reputation took a big knock in September when mortgage lender Northern Rock PLC was forced to turn to the government for emergency funding after the debt markets dried up, leading to the country's first bank run in a century. A Parliament review faulted the U.K. markets regulator, the Financial Services Authority, as well as the Bank of England and the Treasury department for their handling of Northern Rock.
In France, Societe Generale SA recently disclosed the world's largest banking fraud. It caused trading losses of 4.9 billion euros ($7.2 billion) that have, in part, been blamed on poor supervision both within and outside the bank.
Mr. Prodi resigned his position as Italian prime minister last week.
The leaders discussed a range of topics. Rating agencies, which many have blamed for contributing to the credit crunch by not spotting the risk of complex structured-credit products, were told by Mr. Brown that they need to be more transparent and that there needs to be an "objective reality" to their ratings. If these agencies don't reform themselves, the Europeans would turn to regulatory response to enforce change, Mr. Brown said.
The announcement on global regulation should receive a sympathetic hearing around the world, including in the U.S., said Howell Jackson, a professor specializing in financial regulation at Harvard University. "All of the major economies are acutely aware that volatility spreads across national boundaries," he said. That said, he thinks the IMF and Financial Stability Forum will need a significant retooling to be effective as global regulators, and it must be much closer to the ground to identify issues such as credit bubbles.
Today, the U.K. government is expected to shift its regulatory focus closer to home when Finance Minister Alistair Darling proposes changes that would strengthen regulatory powers at the Bank of England and the FSA. This is likely to include giving the FSA the right to demand more detailed financial information from banks as well as the ability to take control of bank deposits when lenders run into trouble; now, it must wait for a bank to default.
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Katharina Bart and Laurence Norman contributed to this article.
