Economia Finanziaria e Monetaria Lezione 14 – Recuperare stabilità: riforma finanziaria (UE vs. USA) 1 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 0. Outline Scaletta della lezione 14 1. Le buone intenzioni del G-20 del 2009 2. La ri-regolamentazione finanziaria USA 3. La ri-regolamentazione finanziaria UE 4. La ri-regolamentazione finanziaria in East Asia 5. Congruenze e divergenze tra UE, USA e East Asia 6. Il “lento pede” della ri-regolamentazione finanziaria 2 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 1. Le buone intenzioni del G-20 del 2009 – 1 Important decisions were agreed at the 2 April 2009 meeting of the G20 in London and at its 25 September 2009 meeting in Pittsburgh. The London meeting of the G20: Among the proposed measures the ones key to our discussion were: i) scaling up the resources available to the IMF for crisis prevention and assistance; ii) establishing the Financial Stability Board (FSB) with the mandate of collaborating with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them; iii) reshaping regulatory systems to identify and take account of macro-prudential risks; iv) extending regulation and oversight to all systemically important financial institutions, instruments and markets, for the first time including systemically important hedge funds; 3 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 1. Le buone intenzioni del G-20 del 2009 – 2 The London meeting of the G20: (cont’d) v) endorsing and implementing the tough new principles on pay and compensation mandated by the Financial Stability Forum (predecessor to the FSB) and supporting sustainable compensation schemes and the corporate social responsibility of all firms; vi) taking action, once recovery is assured, to improve the quality, quantity, and international consistency of banks’ capital. In future, regulation should prevent excessive leverage and require buffers of resources to be built up in good times; vii) taking action against non-cooperative jurisdictions, including tax havens, standing ready to deploy sanctions to protect members’ public finances and financial systems; viii) calling on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; 4 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 1. Le buone intenzioni del G-20 del 2009 – 3 The London meeting of the G20: (cont’d) ix) extending regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest. The Pittsburgh meeting of the G20: The outcome of the September 2009 meeting of the G20 suggests that the leaders’ attention is still focused on restoring financial stability via sounder regulation/supervision. The communiqué at the end of the meeting stresses that “reckless behaviour and a lack of responsibility led to crisis, we will not allow a return to banking as usual”. 5 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 1. Le buone intenzioni del G-20 del 2009 – 4 The Pittsburgh meeting of the G20: (cont’d) It also commits to: raise capital standards; implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking; improve the over-the-counter derivatives market; and create more powerful tools to hold large global firms to account for the risks they take, where the standards for large global financial firms should be commensurate with the cost of their failure. The G20 mandates the FSB to include major emerging economies and coordinate and monitor progress in strengthening financial regulation. More specific measures are designated to: building high quality capital and mitigating pro- cyclicality; reforming compensation practices to support financial stability; improving over-the-counter derivatives markets; addressing cross-border resolutions and systemically important financial institutions. 6 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 1. Le buone intenzioni del G-20 del 2009 – 5 The Pittsburgh meeting of the G20: (cont’d) Regarding the controversial issue of the bonuses, it is agreed that more will be paid out in shares rather than cash, and more pay will be deferred. In particular, efforts will be made to tie remuneration more closely to long-term value creation—more paid in restricted shares, with employers able to claw back a portion if trades lead to big losses and multi-year bonus guarantees to be avoided. It is also worth noting that, in the preamble, the world leaders admonish “a sense of normalcy should not lead to complacency”. 7 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 2. La ri-regolamentazione finanziaria USA – 1 The US prospected reform: In the US, President Obama has put forward his blueprint for reform on 17 June 2009 (US Treasury, 2009). It is useful to summarise the main ingredients of the US reform plan for two chief reasons: i) to check whether the US prospected actions are consistent with those in the EU and East Asia; ii) because the US is still the most important financial centre and, thus, what is going to happen there cannot be disregarded elsewhere. In essence, this is a wide range proposal that, if adopted, would greatly overhaul the financial system. It tackles several issues with a macroprudential approach under the authority and responsibility of the Fed: 8 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 2. La ri-regolamentazione finanziaria USA – 2 The US prospected reform: (cont’d) 1) promoting robust supervision and regulation of financial firms: creating a Financial Services Oversight Council to facilitate information sharing and coordination, identify emerging risks and assist the Fed on the identification of firms whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness (Tier 1 FHCs); facilitating coordination among all the relevant Agencies; implementing heightened consolidated supervision & regulation of all large, interconnected financial firms; strengthening capital and other prudential standards for all banks and BHCs; better aligning executive compensation practices of financial firms with long-term shareholder value and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions; 9 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 2. La ri-regolamentazione finanziaria USA – 3 The US prospected reform: (cont’d) 1) (cont’d) adopting accounting standards to induce financial firms to employ more forward-looking loan loss provisioning practices that incorporate a broader range of available credit information; revise fair value accounting rules to provide users of financial reports with both fair value information and greater transparency regarding the cash flows management expects to receive by holding investments; strengthening firewalls between banks and their affiliates to protect the federal safety net that supports banks and to prevent spread of the subsidy inherent in the federal safety net to bank affiliates; close loopholes in bank regulation; requiring hedge funds and other private pools of capital to register; reducing the susceptibility of money market mutual funds to runs; enhancing oversight of the insurance sector; 10 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 2. La ri-regolamentazione finanziaria USA – 4 The US prospected reform: (cont’d) 2) establishing comprehensive regulation of financial markets: strengthening supervision and regulation of securitisation markets requiring originators to retain an economic interest in a material portion of the credit risk of securitised credit exposures, aligning compensation of market participants with longer term performance of the underlying loans and increasing the transparency and standardization of securitisation markets requiring robust reporting by issuers of ABS; strengthening the regulation of credit rating agencies including robust policies/ procedures to manage and disclose conflicts of interest, differentiate between structured and other products, and otherwise strengthen the integrity of the ratings process and reducing the use of credit ratings in regulations and supervisory practices; creating comprehensive regulation of all OTC derivatives, including CDS; harmonizing futures and securities regulation. 11 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 2. La ri-regolamentazione finanziaria USA – 5 The US prospected reform: (cont’d) 3) protecting consumers and investors from financial abuse: creating a new Consumer Financial Protection Agency with the authority/responsibility to improve: a) transparency; b) simplicity; c) fairness; d) access; strengthening investor protection through the SEC. 4) providing the government with the tools it needs to manage financial crises: creating a resolution regime for failing BHCs, including Tier 1 FHCs; amending the Fed’s emergency lending authority so that it will not need prior written approval of the Secretary of the Treasury for any extensions of credit by the Fed to individuals, partnerships, or corporations in “unusual and exigent circumstances.” 12 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012 2. La ri-regolamentazione