On a day when the Dow Jones Dow Jones industrial average fell below 9,600 (before recovering somewhat before the close), its lowest level in more than five years, the Group of Thirty issued a report that analyzes the current challenges facing the global financial system and offers information that may help guide future banking regulation reforms.The report, "The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace," was issued by the Washington, D.C.-based Group of Thirty, an international body composed of central bank governors, economists and private financial sector experts, on the eve of the meeting of G7 finance ministers and central bank governors in Washington. The officials who presented the report in New York took pains to emphasize that this report is the first step in what will be a wide-scale effort to address the needs for regulatory and supervisory reform that have been demonstrated so dramatically in recent weeks. "We hope this will help frame the debate about modernizing the [regulatory system]," said Jacob A. Frenkel, chairman of the Group of Thirty, Vice Chairman of AIG, and former Governor of the Bank of Israel at a press conference on Monday, Oct. 6. According to Paul Volcker, chairman of the G30's Board of Trustees, and former chairman of the Federal Reserve Board, the study (which was launched last year although it "germinated several years ago") was intended primarily to review existing regulatory structures, rather than make any specific proposals for reform. "It was conceived as Part One of our work in this area," he said. In the meantime, however, "It was quite obvious that the earth has moved" since the study was launched, Volcker acknowledged. "The large investment banking organizations have disappeared before our eyes as we were writing this report." And while the report declines to make specific recommendations, he added, "there's no doubt that the [current] system of regulation and supervision needs to be revised," not only in the U.S. but in other global markets, as well. The G30 report concluded there are four approaches to financial supervision currently employed across the globe, and describes them as institutional (where a firm's legal status determines which regulator is tasked with overseeing its activity); functional (supervisory oversight is determined by the business that is being transacted by the entity without regard to its legal status); integrated (a single universal regulator conducts both safety and soundness oversight as well as conduct-of-business regulation for all the sectors of financial services business); and "twin peaks" (there is a separation of regulatory functions between two regulators -- one that performs the safety and soundness supervision function and the other that focuses on conduct of business regulation). The U.S. structure is described in the report as functional with institutional aspects; last year's U.S. Treasury Blueprint advocates a modified Twin Peaks approach as a long-term goal. "None of these structures by itself proved to be optimal," pointed out Roger W. Ferguson, Jr., president and CEO of TIAA-CREF, former vice chairman of the Fed and vice chairman of the G30 Regulatory Systems Working Group. But as far as what works or is important going forward, Ferguson said, one key is a "transparent deposit protection scheme." The report also showed "the value and necessity of communication and coordination" among regulatory and supervisory bodies and the central banks. "If [we] see weaknesses in the linkages, the chances of mishap increase," Ferguson said. Among the questions left unanswered by the report, according to Ferguson, are how much power central banks actually should have, how to deal with unregulated institutions, and what form international cooperation should take going forward. The reference to Treasury Secretary Paulson's "blueprint" proposals of last year spurred an observation relating to the fact that until recently (at least in the U.S.) calls for regulatory reform probably had more to do with providing competitive advantage to financial institutions than with the transparency and accountability that are the priorities now. Volcker noted that in the name of competitive advantage and flexibility, "a lot of activities were taken one way or another" - especially as financial institutions exploited the market for credit alternatives. "Now everyone's running back to mother -- commercial banks," Volcker said. "It's an interesting phenomenon." Volcker also emphasized that as important as regulation and supervision are to the health of the financial markets, they are "not the whole show. Don't count on it to solve all crises. We can improve [regulation and supervision], but when we look at the [current] crisis, a lot of things went wrong, [including] inside financial institutions and the structure of finance."
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio