A global body with legal powers may be needed over time to enforce the world's new financial rules, Britain's Financial Services Authority (FSA) said on Wednesday. The FSA's newly appointed and first director of international affairs, Verena Ross, said the Financial Stability Board (FSB) was key to ensuring all gaps in regulation between securities, insurance and banking sectors were plugged.
Formerly known as the Financial Stability Forum, the FSB was expanded in April to include central bankers and finance ministry and regulatory officials from all Group of 20 (G20) countries. The G20 has asked the body, chaired by Bank of Italy Governor Mario Draghi, to co-ordinate global efforts to introduce new financial rules in light of the sector's worst crisis in 70 years.
"I would advocate to make sure the FSB have a strong secretariat to support their work," Ross told a City and Financial Conference. "The role of the FSB is crucial. We will need to make sure it is able to play its role forcefully... Success depends on real progress over the next six to 12 months," she said. But the board has no legal teeth and there are "real questions" about whether the world can continue with such informal arrangements in the longer term, Ross said.
There may be a case for exploring the need for a more formal global regulatory framework, such as a body with legal powers of enforcement like the World Trade Organisation, Ross added. "Any move in that long-term direction would have the FSB very firmly at the centre of that global regulatory architecture," Ross said. Regulators need to be better at checking on the enforcement of the new rules and banks have a role in this, she said.
Banks have urged a co-ordinated global approach to regulation to stop some countries having an unfair advantage, especially in tougher bank and liquidity rules due to take effect by the end of 2012. Angela Knight, chief executive of the British Bankers' Association, said it was clear the minimum 8 percent of capital banks must hold under the global Basel II accord would rise. "The crisis has demonstrated that the Basel international capital rules were wrong. They neither judged correctly the amount of capital that was needed to be in the system nor the amount that banks needed to hold," Knight said.
Basel is being toughened up to include a leverage ratio or cap, minimum liquidity levels, capital charges on trading books and improvements in the quality of capital that must be held. "Capital, that is the big cost. That will have the greatest consequence on how the industry will be able to perform its business," Knight said.
Banks in Britain have already doubled their capital requirements from the 8 percent Basel minimum, she added. A proper impact assessment is therefore needed on the effect of tougher capital rules on lending and economy as well as timing of the new rules, Knight said. FSA Chairman Adair Turner has called some banking services "socially useless", but Knight warned against using "buzzwords and catchphrases" as activities such as securitisation were being maligned even though they provided finance raising.
The securitisation market has just started to reopen after freezing during the credit crunch and must be allowed to continue reviving, she said. Banks are also concerned about global plans for a cap on leverage, saying it should only be a backstop and not interfere with capital requirement rules for "normal business as usual". Katharine Seal, a director at the London Investment Banking Association, said: "It's an area where an ability to be flexible is absolutely paramount."
Knight expects the European Union to beef up consumer protection, such as direct product regulation, which UK lawmakers may support. "There is a case for looking at that issue," said John McFall, chairman of Britain's parliamentary treasury committee.
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