Chairman of the Financial Stability Forum and Governor of the Banca d’Italia Mario Draghi comments on FSF plans, due to be published in detail tomorrow, to overhaul regulation in the wake of the financial crisis. The plans will apply to all financial companies that pose a risk to the economy if they fail, including hedge funds, he said. He spoke today to reporters in London.
On hedge funds:
“The aim of our recommendations on regulation is to make sure that whatever systemically important institutions -- whether it be a bank or a hedge fund, if it has systemic importance -- will have to be subject to oversight.”
On getting banks to build up capital cushions:
“The recommendations will be aimed at those aspects of regulation that look pro-cyclical right now. The aim is to mitigate this pro-cyclicality. How? Well, first of all is to make sure that financial institutions accumulate capital in the good times so they have capital to draw -- cushions, buffers -- to draw on during bad. This will basically imply a strengthening of Basel II concepts. We aren’t ruling out the siding of Basel with a leverage ratio. This would accomplish the same rules in a fairly dramatic way.”
On how banks account for losses:
“Right now you can’t provision other than in a limited fashion for expected losses, only for actual incurred losses, which means that banks are being called to set aside capital at the time they are incurring the losses: the worst possible time. This regulation, accounting-wise, is highly pro-cyclical.”
On whether the FSF will become a global regulator:
“I don’t see the FSF becoming a global regulator at the present time. The present consensus, which I’d say has been working now for 60 years, is one where the global regulators are the standard-setting bodies and the IMF has worked as a coordinating mechanism across these bodies and across most national authorities. The IMF is a member of the FSF. The FSF designs, develops and changes regulation standards through the work of its member bodies.”
On U.S. plans to remove toxic assets from banks’ balance sheets:
“I think the plan is certainly a welcome development, well thought and well designed. It needs to be supported -- and is being supported -- by all parties concerned.”
On whether it’s better to have bad banks or ring-fence assets:
“The specific measures that are being undertaken in different cases, like ring-fencing assets within a bank, or taking them off and putting them in a bad bank, reflects the specific situations and countries and financial structures. The key thing, it’s very important have the same goal, namely to try to find a credible floor to banks’ losses. What the markets want to see is that there is a floor to banks’ losses that is credible.”
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