The European Commission formally adopted its long-anticipated plan for coordinating European markets on Sept. 23, just one day before the kickoff of the Pittsburgh G-20 summit. Mario Nava, who heads the European Commission’s Financial Market Infrastructure Unit, says the timing of the EU’s plan alone offers a good indication of the degree to which regulators in the United States and Europe coordinate their activities among each other.
“International cooperation is simply embedded in any new regulation undertaken these days,” he says. “We set the Sept. 23 deadline months ago so that (European Commission President José Manuel) Barroso would have something to put in his luggage for Pittsburgh.”
And when Barroso showed up in Pittsburgh, he was able to offer the Americans a glimpse into a future European Union where individual member countries develop and enforce similar rules in a way that makes it possible for regulators across the Continent to identify systemic risks early and respond with something resembling a coordinated attack.
The proposed legislation that Barroso presented includes the formation of a new European Systemic Risk Board (ESRB) and a European System of Financial Supervisors (ESFS) manned by the heads of national regulators and three new European Supervisory Authorities for the banking, securities and insurance and occupational pensions sectors.
Just a few weeks earlier, Nava had participated in a panel discussion at the 30th Bürgenstock Meeting in Interlaken, Switzerland, where American and European regulators seemed to all be reading from the same play book.
All agreed that no regulatory model consistently beats the others in hitting the regulatory sweet spot where intervention and freedom perfectly balance each other out, but they also agreed that some lessons had more value than others, and that overly-liberal capital adequacy requirements were the single biggest driver of the current economic mess.
Participants also agreed that over-leveraging takes on an even more menacing dimension when massive global banks are in the game and that regulators need to re-think the premise of “too big to fail.”
“If we don’t use this opportunity now to tackle the problem of too-big-to-fail, we will always have these giants blackmailing us and threatening to bring the economy to a halt if we don’t meet their demands,” said Daniel Zuberbühler, vice chairman of the Swiss Financial Market Supervisory Authority (FINMA).
By month-end, FINMA had made good on Zuberbühler’s Bürgenstock declaration by publishing a strategy paper calling for tighter regulation on Switzerland’s two global banks, UBS and Credit Suisse, than on other domestic and international competitors.
“In Switzerland, we don’t call them the Big Banks,” Zuberbühler says. “We call them the Big Babies, because they are undisciplined but systemically relevant.”
The FINMA paper also made it clear that Switzerland will work aggressively to protect itself from systemic risk.
Zuberbühler says the plan ultimately boils down to more robust capital requirements and an emphasis on making sure that the assets that banks list are truly “sustainable assets” as opposed to windfalls or other ephemeral items in the plus column.
Ditto, he says, the anti-cyclical buffer, which increases capital requirements in difficult times.
“We believe that UBS and Credit Swiss need 100% more than the minimum of Basel II in good times and up to 150% in bad times,” he says, adding that the “Swiss Finish” is gaining credence with the Basel Committee on Banking Supervision.
The banks, not surprisingly, have been fighting back, arguing in the international media that regulation will increase the cost of doing business, and in the local media that targeted regulation will hobble Switzerland’s national champions.
Nava says the arguments don’t give regulators enough credit.
“We are not simpletons,” he says. “We understand that corporations are not in the business of having liquidity available for margin calls, and we will distinguish between hedgers and speculators.”
CFTC Commissioner Michael Dunn points out that the banks suffered in the crisis as well, and only managed to survive because of government intervention.
“Basically, they shifted their risk to us, the taxpayers, and raising capital requirements just shifts it back where it belongs,” he says.