Support For Harmonizing Global Regulations

In a post a few months back, I offered a series of policy recommendations given what I had observed during the credit crisis:

Is the financial system somewhat broken and in need of reform? Absolutely. But is the increasingly liberalized system in place today an essential element of a healthy, integrated and global financial marketplace? I think the answer is also a resounding yes. So where have things broken down, and what can we do to fix them? Here are some ideas:

1. Increase transparency among regulated institutions
2. Homogenize global accounting standards
3. Homogenize global regulatory frameworks
4. Aggressively strip conflicts of interest out of the system
5. Clarify the roles and responsibilities of fiduciaries
6. Develop common sense compensation policies and practices

Yesterday, Josef Ackermann, the CEO of my former employer Deutsche Bank (DB), came out with a subset of my prescriptives when speaking at a conference (as reported by Thomson Financial News):

'The nationalistic approach (to regulation) is just too narrow ... the crisis has clearly revealed, not caused, this fundamental flaw,' he said, referring to the drought in credit markets sparked by bad mortgage debts in the U.S.

Speaking at a conference here on financial market regulation hosted by the London School of Economics and Deutsche Bank, Ackermann also acknowledged the importance of transparency to restore confidence in markets -- but he said there must be limits...

Meanwhile, accounting standards and practices should also be harmonized for complex financial instruments, Ackermann said. The differences between U.S. GAAP and IFRS regulations are significant, he added.

Joe hit my top three dead on. He is at the helm of a global behemoth worth approximately $1 trillion in assets, operating in something like 100 markets and jurisdictions every day. He knows the difficulty, first hand, of having to deal with such a complicated amalgam of rules, regulations and standards. It places enormous friction on global transactions and doesn't really protect investors any better than under a standard, global, common sense regime.

It is possible for countries to maintain their unique identities, even if their accounting rules and market regulations are similar to those of their neighbors. While market efficiency has grown along with global capital flows and market liberalization in general, disparate rule sets continue to place a tax on investors and advisers alike.

And it is high time that the leaders of nations get serious, get busy and get to work hammering out common standards. Because the markets need all the help they can get. And this is a step in the right direction.

Comments

[Fed up]

I think you are right on target about the importance of coordinated and properly regulated markets world wide. The biggest threat to world economies in the last 30 years seems to me not the natural business cycle or famine, pestulence and drought, but the immoral and corrupt behavior of bad actors in our increasingly free markets. It is inconceivable to me that world authorities sat back while financial miscreants sold tons of bogus mortages and then peddled them around the world as AAA, often through vehicles that weren't even carried on their books. What kind of group stupidity is that?? Yes, it would be nice to have a coordinated worldwide regulatory approach, but what hope to we have of that if we can't even prevent an obvious scam like the mortgage hoax right here in our own country?

[fabian hug]

I think the problem doesn't pertain to regulation. I mean the basic regulation "fair and true" is already in place all over the world. What else do you want to say? The true and fair value is $ 999! There will always be room to interpretation and sentiment whenever a market is not liquid. Some will do an honest job some will not. Furthermore I bet that if regulation is changed now, it is going to have a bias toward improving the situation in a bear market (I read more and more about the inaptitude of the "mark to market method). This new set of rules will not work in a bull market and everybody will want to change again.
Last but not least, when the whole world will have the same regulations, the whole world will be wrong at the same time. Believe it or not this will happen.
I think the problem lies more with the set of indicators policy makers work with. These indicators focus too much on macro data where micro economic data are not taken into consideration. Policies are then disconnected from micro economic realities and a crisis can quietly grow unnoticed until it is too late. Living in Los Angeles for two years, it was pretty obvious that something had to happen.