Thursday, September 25, 2008

Global Monetary Authority

If the US Treasury and Federal Reserve succeed, maybe they are the Global Monetary Authority or as near as may get to one? But, in many respects we already have a “Global Monetary Authority to oversee markets that have become borderless” and it is the Bank for International Settlements, and it has an enormous regulatory impact working through national regulators, central banks, ECB etc. under whose auspices bankers and regulators met in committees to author Basel I and now Basel II.
BIS is the only body that gives us data on world FX, money market, payments clearing and net cross-border flows etc. What it is not is a global central bank that oversees by intervening directly in the world’s capital markets. It is to the capital markets what the FIBV plus IOSCO are to the world’s securities markets or more than that. A distinction needs to be made, however, between regulating market participants and regulating the market itself insofar as the two can be separated.
Banks should all have compliance officers, risk officers and auditors whose duty of care (in theory and in practise) is first to the rule of law and only second to their employer the bank. In the EU Basel II (the CRD) is the law. Many other rules have the force of law. Anyone doubting this should not that, across the USA and Europe, bank and brokerage offices are being raided by armed police. Four hundred arrests have already been made among financial officers in the USA alone. There are court cases and arrests, actual or pending, connected to each bankruptcy ranging from IKB and N.Rock to 20 European money market funds, 30 US sub-prime mortgage brokers and Lehmans and others. There will be hundreds more arrests and some more bank failures. Several hundred credit crunch court cases and law suits are outstanding. Regulators have imposed tens of $€£ billions in reserve capital penalties plus fines. Hundreds of detailed extra audit enquiries are ongoing, many of them cross-border. EU regulators are coordinated and coordinating and banks are finding they can have capital impositions imposed on them by several regulators.
But, it seems to me that much public comment fails to distinguish between liquidity and solvency, between market failure and bank failure. These different aspects require different if not unrelated regulatory regimes for ensuring transparancy and oversight e.g.:
1. auditing each firm's own compliance and self-regulation (regulatory supervisors)
2. ensuring comprehensive reporting (auditors and regulatory supervisors)
3. having a central controlling role in overseeing markets (stock exchanges)
4. intervening daily in the markets (central banks)
5. guaranteeing and clearing the markets (central clearing houses).
Regulators that, like central banks or clearing houses, are market participants in a central role have a vital regulatory power that is quite diifferent in quality to supervision of individual firms. Both are necessary.
When we accuse individual banks of malfeasance, naivete, excessive risk-taking etc. we should not forget that the credit crunch is a systemic or market failure, and that it should be easier and more efficient to regulate the quality of markets, how they operate, than to regulate the quality of all players in those markets, hence the many calls to bring the world’s capital markets on-exchange and away from over-the-counter dealing, and that the Fed and US Treasury should build an interbank credit and derivatives exchange (see Gilad Livne and Alistair Milne FT 24 Sept).
Formally regulating OTC markets by replacing them with exchanges may be more vital than creating a global monetary authority by building onto BIS, or a combination of BIS and the IMF.

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