Our view:
After months of a patient wait and watch policy, Liu Mingkang Chairman of China Bank Regulatory Commission has asked U.S. to step up its regulatory reforms and take more aggressive measures to clean up its Banking system, so as to pave the way of a real global recovery. “Toxic assets issue must be immediately resolved worldwide” said Mr. Liu addressing the Institute Of International Finance at a industry body meet. Joining the increasing number of critics both within and outside the U.S. in the Treasury’s attempt to cover up the bad risks with capital augmentation, Mr. Liu argued that as long as toxic assets remain on the Banks balance sheets, government authorities will “have to run as fast as they can, to keep those assets from eroding the Banks capital.” Criticizing the approach of the Western economies to tackling the toxic assets problem, Mr. Liu in a uncharacteristic blunt and forthright tone said “ They need a new road map, a new cooking manual” and went on to add “ China has got very good Chinese cuisine. If you need that manual, I can offer it to you free” Strong statement from the biggest investor of U.S. Dollars and Treasury bonds.
Coming on the eve of the G8 finance ministers meet at Italy, this unusually strong Chinese remark is seen as a clear indication of China’s preferance to clean up the global Banking crisis in a way distinctly different from that pursued by the U.S. Treasury secretary Tim Geithner. As a matter of fact the words of the China Bank’s regulatory Chief would be music to the ears of group of 27 EU nations resisting the U.S. approach to risk management by mere capital augmentation.
Regulators in the 27 EU countries will assess risks in the market, rather than capital needs, the Committee of European Banking Supervisors in London said last month. The results will also be privately reported to finance ministers and the EU’s executive agency in Brussels and findings for individual companies won’t be published. “We are in favour of a stress test as regards the system as a whole, not with a view to the specific capital situation of individual banks, and no publication,” Germany’s Peer Steinbrueck said June 9, dismissing the U.S. approach to risk management. Christine Lagarde of France however felt the need of selective disclosure to bolster public and investor confidence and said that a decision shall be reached in the G8 meet before this weekend.
Europe has been so far ahead of the America. in ushering regulatory reforms despite internal resistance amongst few countries notably Britain, who are primarily wary of the financial power centre shift from London due to such increased regulatory controls to Brussels. In two landmark decisions the EU last month have announced plans to provide stringent EU monitoring of Banks previously monitored only by their country of origin. The European Systemic Risk Council a body that will monitor trends and provide an early warning of possible risks and a European System of financial supervisors, which will monitor Banks across the EU.
By marked contrast the strong toxic Bank lobby in the U.S. supported by the Geithner-Bernanke duo have held up progress of real regulatory reforms in America. Not only has there been no consensus on how to regulate, there is a marked confusion in the administration about who shall regulate. The Centre for Public Integrity, a non-profit organization claims that the $ 380 million in contributions given over the last 10 years to politicians, Senators and Congressmen could now be working overtime to dilute or stall decision making in reforms and regulatory changes in the U.S. Banking sector.
In March 26 at a congressional testimony, Geithner said that “we need to establish a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.” His suggestion that the Mr. Bernanke of Federal Reserve hold the regulatory control of all financial bodies came up with stiff opposition amongst both the Congress as well as other regulators. U.S. lenders are currently regulated by at least half a dozen federal agencies: the Federal Reserve, the Federal Insurance or FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Security and Exchange Commission. FDIC Chief Sheila Bair who appears to be the one of the few prudent regulators in Washington who has kept away from the influence of the Toxic Bank lobby and has been emphasising the need to force the disgorgement of troubled assets from troubled institutions, opposed Geithner’s move to shield Banks with Fed as a sole regulator.
In a May 7 speech in Chicago, FDIC Chief Bair proposed a “Systemic Risk Council” which include a group of regulators said that such a group could have “a mandate to monitor developments throughout the financial system, and the authority to take action to mitigate systemic risk.” Security and Exchange Chairman Mary Schapiro said the next day that she was “inclined” to support Bair’s proposal, a setback to Treasury boss Geithner who was pumping for Bernanke to do the job single handed. The Systemic Risk Council proposal is something close to the EU proposal of multi body governance of financial institutions to avoid future failures.
As a matter of fact the proposal of a Risk council is a much better option than handing over the regulatory control to the Fed and Bernanke who have not so long ago failed to regulate the two big institutions under its direct authority the Citibank and the AIG which have been at the centre of the Banking crisis. After Bank Of America Chief Kenneth Lewis testified to being pressurised by Bernanke and former treasury boss Paulson to buy the beleaguered Merrill Lynch, Bernanke came under fire at a House Oversight Committee hearing early this week for his role last year in what some legislators believed to be a role out of his purview, specifically crafted to help out Merrill shareholders. .Besides Congressman Ron Paul has introduced H.R.1207: Federal Reserve Transparency Act of 2009 a bill to audit the Federal Reserve which if passed will trim the all pervading reach of the Fed and make the U.S. regulators more accountable to fair accounting practices, that global investors look forward to.
As a matter of fact there is a considerable difference of opinion even in U.S. though the Geithner-Bernanke duo supported by Toxic the Bank lobby have been able to convince the Obama administration to follow the “ Too Big to fail” policy and make the toxic Banks even bigger by capital augmentation. The next round of tussle is likely to be witnessed after June 17th when the U.S. administration unveils the new reform regulatory plan which is reportedly a rehash of the Geithner – Bernanke plan to maintain status quo for the Bank lobby bringing about only cosmetic changes to avoid public criticism. With support for Sheila Bair regulatory council growing and the Congress getting increasingly involved in verifying regulatory reforms, the Geithner- Bernanke bank lobby then may face testing times to push through its proposals.
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