Slideshow 5 Up and 5 Down: The Pros and Cons of Financial Reform

  • April 26 2012, 10:11am EDT
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5 Up and 5 Down: The Pros and Cons of Financial Reform<br><br>

At a financial forum organized by Paris Europlace and held at the New York Stock Exchange, Citigroup vice chairman Lewis B. Kaden gave his view of five positive contributions from reform proposals under development in the U.S. and in Europe, since the global financial crisis of 2008.

Then he focused on five areas that require “a great deal of further study.’’

Here they are.

POSITIVE #1: Greater Collection of Data<br><br>

The capacity given to the U.S. Treasury by the Dodd-Frank Wall Street Reform Act to gather relevant data from all market participants.

“The limitations on their capacity to gather that data without begging for it from unregulated entities was a serious problem during the crisis,’’ Kaden said.

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POSITIVE #2: Transparency of Swaps<br><br>

The core principle of the derivatives article of the Dodd-Frank act is that the financial system will benefit and financial flows “will ultimately be increased if there is more transparency” on the swapping of risks. This will happen, if clearinghouses and exchanges are used as much as possible.

POSITIVE #3: Creation of a Consumer Protection Service<br><br>

While acknowledging that this view “is not one universally shared within the industry in the United States,’’ the creation of the Consumer Financial Services Protection Agency is a positive.

Poor practices and poor service of consumer interests in mortgages by the unregulated part of the industry wound up infecting “the strongest and best institutions.”

POSITIVE #4: Planning for Failure<br><br>

“Advanced planning on recovery and resolution is a good idea,’’ he said. This tends to be called living wills in Europe and resolution plans in the U.S., he noted.

Either way, “there’s a great deal of mischief that can be achieved if it’s administered in ways that are not so thoughtful and the ball is in the air on that in the U.S. at the moment. But the idea of that kind of strategic planning is important.”

“It’s hard to argue with the idea of advanced planning of what you would do if things went seriously bad,’’ he said.

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POSITIVE #5: Increased Capital Reserves<br><br>

There are specific requirements in the Basel Accords that should be reviewed, he said, that we thought strongly should be reviewed, such as the treatment of minority stakes and smaller firms.

But it’s better that J.P. Morgan Chase, Bank of America, Wells Fargo and other active participants in providing mortgages, credit cards and other forms of consumer credit continue to do that “rather than pushing those families into an unregulated market or worse” because of the incentive structure created by the risk weightings in the Basel rules.

NEGATIVE #1: Unregulated Shadow Banking<br><br>

Kaden expects there to be “expansion or re-creation of a very large, unregulated segment in the financial services industry” as a result of the reforms. The question of how to regulate them, how to treat them, how to make sure this doesn’t re-create problems in the future “is a very important subject.”

NEGATIVE #2: The Prospect of Inconsistency<br><br>

From accounting practices to derivatives regulations to structural reforms, convergence and consistency between the U.S. and Europe could prove elusive. If the rules of the road are different in different parts of the world, “anti-competitive imbalances” will ensue.

“Both sides of the Atlantic seem to be skeptical of what is likely to happen in the other place,’’ he noted. Yet those two sides are fairly closely aligned on Basel rules, for instance. The lack of consistency widens when you get to the rest of the world, he said.

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NEGATIVE #3: The Quality of Supervision<br><br>

“All of us have an interest in high class supervision, high talent supervision, and our structures are not altogether oriented in that direction as much as they should be,’’ he said.

NEGATIVE #4: Weak Corporate Governance<br><br>

What really is the role and responsibility of boards of directors? How should they be composed so they function both individually and organically as a constructive force in the economy? This, he said, is “very important, and very kind of undernourished in current work.”

NEGATIVE #5: Finding the Right Balance<br><br>

Everything in this world is about balance and moderation, he said. And there’s no singular goal that answers the question, either of how to avoid the next severe crisis or how to respond to the lessons learned of this one. In the end, all the reform has to end in “the promotion of appropriate levels of economic investment and economic growth and prosperity, with the objective of making the system safe and sound,’’ he said.