• Does the financial crisis threaten capitalism?
• Can global leaders agree on financial regulation?
• Will the IMF become a global financial watchdog?

Is a global consensus on financial reforms needed?

Stuart P. M. MacKintosh Executive Director The Group of Thirty. Written for CQ Global Researcher, July 2009	Mark A. Calabria Director, Financial Regulation Studies, Cato Institute. Written for CQ Global Researcher, July 2009

How to Fix the Global Financial System

Two groups of international financial experts who studied last year's financial meltdown made a variety of recommendations on how to strengthen the global financial system. Some of the recommendations have been adopted by various countries, but others are still being debated.

Recommendations from the European Union panel headed by former International Monetary Fund Managing Director Jacques de Larosière include:

• Requiring banks to retain 5 percent of the securitized products they originate and sell, to make sure they keep “skin in the game” — or have a vested interest in making sure the products are properly managed.

• Strengthening individual nations' investigative and enforcement agencies throughout the EU so they can detect and punish crimes.

• Creating a well-funded EU-wide clearinghouse for over-the-counter investments and complex investments, like credit default swaps — the investment insurance products that fueled the credit crisis.

• Authorizing the Financial Stability Forum — an international banking organization based in Switzerland — to set global banking standards.

• Establishing a global watchdog role for the International Monetary Fund in Washington to spot violations of financial standards and sound an alarm.

The reform plan suggested by the Group of Thirty, headed by former U.S. Federal Reserve Chairman Paul A. Volcker, called for:

• Restricting indebtedness levels and investment riskiness at banks and financial firms that are so big their failure could threaten the entire financial system.

• Requiring strict disclosures by banks to prevent them from concealing debt and risk in off-book, non-bank entities.

• Centralizing government oversight of financial markets, particularly in the United States, where responsibility is spread among many different federal and stage regulators.

• Regulating hedge funds and other large private-capital pools if their size poses a systemwide risk.

[1] “Report of the High-Level Group on Financial Supervision in the European Union,” European Commission, February 2009, http://ec.europa.eu/commission_barroso/president/pdf/statement_20090225_en.pdf.

Footnote: 1. “Report of the High-Level Group on Financial Supervision in the European Union,” European Commission, February 2009, http://ec.europa.eu/commission_barroso/president/pdf/statement_20090225_en.pdf.

[2] Eight very large, non-bank financial firms in the United States should have been closely scrutinized by regulators but were not, the report said: five investment banks; AIG, the world's largest insurance company; and the two government-backed mortgage companies, Fannie Mae and Freddie Mac. See Group of Thirty, “Financial Reform: A Framework for Financial Stability,” January 2009, p. 24, www.group30.org/pubs/pub_1460.htm.

Footnote: 2. Eight very large, non-bank financial firms in the United States should have been closely scrutinized by regulators but were not, the report said: five investment banks; AIG, the world's largest insurance company; and the two government-backed mortgage companies, Fannie Mae and Freddie Mac. See Group of Thirty, “Financial Reform: A Framework for Financial Stability,” January 2009, p. 24, www.group30.org/pubs/pub_1460.htm.

[3] Brad Keoun, “Citi Agrees to Acquire SIV Assets for $17.4 Billion,” Bloomberg News, Nov. 19, 2008, www.bloomberg.com/apps/news?pid=20601087&sid=a4yl_7w1N9co&refer=home.

Footnote: 3. Brad Keoun, “Citi Agrees to Acquire SIV Assets for $17.4 Billion,” Bloomberg News, Nov. 19, 2008, www.bloomberg.com/apps/news?pid=20601087&sid=a4yl_7w1N9co&refer=home.