13th January 2010:

“HOW TO RESTORE FINANCIAL STABILITY” is ...

... the title of a new report from the Centre for European Reform (‘CER’) which was sponsored by BDO and launched yesterday in Brussels; there is a London launch on 2 February.
 
The main presentation was by Philip Smythe, the author of the report, but there were contributions from others including Peter Chidgey, a partner from BDO UK who heads up their financial services industry group.
 
There were some interesting views on whether there is a need to regulate hedge funds.  Philip suggested not on the basis that they didn’t cause the crisis; that they were less leveraged than banks; that they had traded in CDOs; and had been allowed to fail without causing contagion to the rest of the system.  He contrasted this to banks which were regulated but where these problems had arisen – and suggested the focus should be on improving regulation for banks rather than regulating hedge funds.  The main argument for regulating hedge funds (which was expressed as being a ‘Brussels based view’) seemed to be that an unprecedented crisis demanded an unprecedented response and that it may be better to over-react; that we didn’t know if or how hedge funds might have contributed to the crisis; and that the only way we can know what hedge funds are doing (and address political concerns) is by regulating them.  Hardly the strongest argument I have heard but if it holds sway in Brussels than I fear that we may face regulation in a variety of areas where it is not needed.
 
The most interesting view expressed by Philip, however, and which did seem to get widespread support is the need to ‘reverse the terms of trade between state and banks’.  As Philip noted, in medieval Europe the biggest concern of the banks was that an individual sovereign (who were the banks major customers) might default on his debt (there were no female sovereigns at the time); the biggest risk now is to the state that a bank might default.  This is a complete reversal of roles and there is a concern that by removing the risk of failure for banks we have weakened the incentive for them to take risk management sufficiently seriously.  It was noted that Governments have ‘talked tough but acted weak’.  I think this is a different way to understand the challenges we face and why there is so much legitimate political and public interest in how banks run themselves; their corporate governance; and even their remuneration policies.  As with many other challenges there are no easy – or obvious – answers.  
 
It was an interesting morning and I am glad we had the opportunity to sponsor this report.  

 Standards & Regulators  0 Comments January 13th, 2010