Credit Crisis Unlikely to Spawn Global Regulatory Response

Policy responses to the current credit crisis will be undertaken at the national and European Union level and will not spawn any “supranational regulatory framework,” Oxford Analytica says in a new report. At the same time, private firms, and private and public sector cooperative bodies, will promote private solutions, and new norms, standards, and best practices, for managing and confronting risk.

Long-awaited proposals were released yesterday to overhaul the EU regulatory and supervision framework for banks conducting business across national borders and to strengthen capital requirements.

If approved by the EU Parliament, the measures would take effect in 2010. A comprehensive rethink of global financial regulation is unfolding in response to the credit crisis, which is enhancing the relative importance of EU and EU member state regulators. The revised framework — which will take several years to realise — will rely on improving internal EU regulation, and promoting global regulatory norms, rather than creating new supranational regulatory institutions.

French President Nicolas Sarkozy has called for a crisis summit to be held on October 4 to include all European G7 members (the United Kingdom, France, Germany, and Italy), the president of the European Central Bank, chairman of the euro-area group, and European Commission representatives.

However, no major regulatory institutional innovations could be expected at G7 level — such as an effort to create any supranational banking or capital markets regulator (despite the enthusiasm of some political figures, such as UK Prime Minister Gordon Brown, for regulatory innovations).

Instead, continued incremental regulatory improvements can be expected in public and private arenas. Some of these bring to fruition efforts initiated at earlier phases of the credit crisis. European regulators, firms, and individuals are playing leading roles in many of these discussions.

Market players are not waiting on regulatory innovations to force changes in their behaviours. Instead, they are currently engaged in major internal discussions over policies to understand, manage, shift, and allocate risk. Risk management is moving away from an undue emphasis on observable prices — this is reflected indirectly in latest SEC fair value guidance — to a more granular understanding of risk, under which risk managers have to understand underlying assumptions upon which a product is expected to operate.

In a related report, OxAn says Congress and the next US president will certainly seek to design a much tighter system of financial services regulation. It is likely to feature firm rules and systematic boundaries encompassing entire industries, rather than identifying and prosecuting potentially culpable individuals.

Much of the OTC derivatives market will migrate to regulated exchanges, and capital-adequacy ratios for a more tightly regulated banking sector will be raised.