Big banks welcome a decision by G7 policymakers to set up "colleges of supervisors" to track them more closely but caution that success will depend on US reforms and how well regulators work together.
The Group of Seven gave the green light to over 60 recommendations at the weekend on how to make the world's financial markets less risky and help avoid a repeat of a credit squeeze that began last year with defaults on US home loans.
Steps include tighter supervision of how top international banks handle complex mortgage-backed investments that have tumbled in value, forcing banks to make huge writedowns - so far totalling about $200 billion - that unnerve investors.
Bank supervisors from countries that oversee a cross-border bank would liaise with each other and more directly and regularly with banks on key issues such as risk management.
The aim is to spot problems before they get out of hand. About 20 to 25 banks, from Merrill Lynch and Morgan Stanley to Deutsche Bank and UBS would be affected. "This is something the European Banking Federation has been promoting and pushing in the European area. We have similar difficulties with cross-border banks that have outgrown the national remit of supervisors," said Robert Priester, EBF's head of banking supervision.
But regulators would need to build up trust outside times of stress so that they can share information speedily without feeling their sovereignty was threatened. "If you want colleges just for times of stress, then I don't think that is the way forward," Priester said.
The London Investment Banking Association (LIBA) agreed. "We would be happy to support anything that enhances relationships and working knowledge outside the stress situation, which will put you in a strong situation when at some point you are facing an unwanted situation," said Katharine Seal, a LIBA director.
"In the middle of a financial crisis is not the best time to get logistics sorted out for the first time," Seal added. Colleges of supervisors are not new. Regulators from Belgium, the Netherlands and France cooperate in overseeing cross-border banks like Fortis, or stock exchange NYSE-Euronext.
Earlier this month, EU finance ministers agreed to set up colleges to meet when there are financial stability concerns over cross-border banks. Colleges still face hurdles to smooth functioning. A proposal by US Treasury Secretary Henry Paulson to give the Federal Reserve oversight over broker dealers as well as banks is key to making colleges work, said Charles Goodhart, a former Bank of England monetary policy committee member.
Without this, banks would argue that broker dealers were being treated more leniently, but it was not certain that Paulson's proposal would be adopted soon whereas the G7 set an end-of-year deadline for creating the new colleges. "If you can't get the same kind of college for Merrill and for J.P. Morgan then you are in trouble," Goodhart said.
Colleges involving Russian or Chinese banks could also be problematic, Goodhart added. Bankruptcy laws differ from one continent or country to another which complicated matters, Goodhart said.
But banks say colleges would bring a better idea of what supervisors from different countries wanted from them. "I would hope the firms and regulators would have a better mutual understanding of each other's concerns. Hopefully the quality of the dialogue can increase," Seal said. It would be difficult for colleges to go beyond information sharing to joint decision making as the legal issue of who pays for bailing out a cross-border bank has yet to be tackled at international level, bankers said.
They also feared duplication of information requests from a college. "Closer supervision is one thing, provided it does not involve huge amounts of arduous reporting," said Anthony Belchambers, chief executive of the Futures and Options Association which represent investment houses and exchanges. "They have to make sure the collective need for information is required through one pipe rather than many pipes," he added.