Top executives from some of the world’s leading banks are due to gather for a conference in Frankfurt later this week to try to forestall what they see as overly harsh regulation brought on by the global financial crisis.

Existing rules failed to ensure that banks held enough capital and liquidity to withstand the crisis, forcing governments to bail out lenders with taxpayers’ money.

Regulators have been moving to put banks on a shorter leash – a set of rules, called “Basel 3″ – with decisions likely to be made by November.

But banking executives argue that a regulatory crackdown on banks could cut 3% off economic growth over the next five years in the US, the euro zone and Japan, and cost almost 10 million jobs.

Two years after the collapse of Lehman Brothers heralded the global financial system’s breakdown, chief executives at Morgan Stanley, Unicredit and Commerzbank are expected to try to convince the audience at the “Banken im Umbruch” conference that they have done their work to stabilise their banks and should not be thrown back by new banking rules.

Banks’ results have improved vastly this year, as provisions for bad loans dropped due to an improved global economy. But the sustainability of profits is still in doubt amid some fears of a “double-dip” recession.

Source: Reuters

Free Registration

Date: Tuesday 7 September 2010

Time: 8:30am BST to 9:30am BST (London)

Post crisis, many central banks’ financial stability mandates have been strengthened.

And many now believe that, in order to better safeguard stability, central banks need a much better understanding of individual banks and the industry’s behaviour. It has, therefore, been argued that central banks should be charged with the prudential regulation of banks.

However, for those that before the crisis were not tasked with regulation, there will be many cultural and operational factors to consider in taking on this role. Additionally, others argue that financial crises will remain nigh-on impossible to spot regardless of which institution is responsible for regulation, and that central banks’ failure to do so will damage their credibility.

Central Banking ON AIR’s next web seminar, “Financial regulation – who should do what?”, will ask whether commentators are right to push for regulation to move back within the central bank. It will further examine how those involved can ensure the transition is as smooth as possible.

Tune in on 7 September 2010 at 8.30am British Summer Time (BST) to hear what our expert panel has to say.

Don’t forget to register to be able access the platform for discussion and put your questions through to the panellists.

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Host: Claire Jones

Claire Jones is the editor of CentralBanking.com, the website of Central Banking Publications which delivers daily news and comment on central banking and financial supervision. She has also written articles for the Central Banking journal. Before becoming a journalist, Claire was an economic researcher at the University of Birmingham. She holds a joint honours degree in philosophy and economics from the London School of Economics.

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The speakers

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Sir John Gieve

Sir John Gieve is a former deputy governor at the Bank of England, where he was responsible for financial stability. Sir John joined the Bank in January 2006. Before his stint at Threadneedle Street, which ended in 2009, Sir John served as permanent secretary for the Home Office. He joined the Civil Service in 1974, working for the department of employment before moving to the Treasury in 1979. He has been a prinicipal private secretary to the chancellor of the exchequer, and between 1991 and 1994 headed the group responsible for policy on banks and City regulators. He holds an undergraduate degree in politics, philosophy and economics, and an MPhil in philosophy from Oxford University.

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Charles Goodhart

Charles Goodhart is professor emeritus at the London School of Economics. Charles was an external member of the Monetary Policy Committee at the Bank of England between 1997 and 2000, and is a former chief adviser at the Bank. He has published numerous articles on the topics of financial stability and regulation. In his spare time he is a sheep farmer (loss making).

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Paul Mortimer-Lee

Paul Mortimer-Lee is the global head of market economics at BNP Paribas, where he has worked since 1995, and is responsible for the global economic coverage of the bank’s team of market economists. Prior to taking up his position with BNP Paribas, Paul spent many years in what is now the monetary analysis division at the Bank of England, where his most recent position was division head for forecasting and conjunctural analysis. Before that, he worked in the Bank’s gilt edged and money markets division, and on issues relating to regulation and tax policy. He has also served a stint at the IMF. Paul was educated at the London School of Economics, where he obtained his undergraduate degree in economics and a masters specialising in monetary economics.

An international survey of leading wholesale banks finds that significant progress has been made in improving compensation policies and practices. Overall, most major banks are now implementing compensation systems in line with the Implementation Standards published by the Financial Stability Board (FSB) in September 2009.

The Institute of International Finance, in collaboration with Oliver Wyman, published its second survey-based report on compensation in the financial services industry, which consists of responses from 37 financial services firms. These have been supplemented by a series of individual interviews with leading wholesale banks. Between them, these institutions represent 70% of total global wholesale banking revenues for 2009.

European governments gave their approval to an overhaul of the way banks and markets in the region are supervised, which was agreed in principle on Thursday night. However, they warned that new pan-European Union watchdogs would need to exercise their powers cautiously.

In Germany, Leo Dautzenberg, a member of Chancellor Angela Merkel’s ruling Christian Democratic Union, and one of its finance policy experts in parliament, hailed the agreement on the EU financial supervision package as “closing an important gap in financial market regulation”.

But he warned the three new EU-level watchdogs – for the banking, insurance and securities markets sectors – to use their powers over national institutions and markets with care.

Under the proposals, these watchdogs will not supervise companies or markets directly, leaving this to national authorities. But they will be required to draw up common technical rules and standards and could acquire additional legally binding powers – including over individual companies – in “emergency situations”.

Dautzenberg also stressed the importance of the “fiscal safeguard” incorporated into the agreement. This prevents the watchdogs from imposing decisions that affect budgets in member states.

UK government officials have already said they believe the final package, secured after months of negotiation, is “a very good outcome for UK” but were understood to be scrutinising the fine details hammered out in negotiations.

French officials said they were satisfied and a “real architecture” for European financial supervision had been created, although the final deal falls short of their ambitions for ­centralised pan-European powers.

The European Central Bank is also likely to have been pleased by the outcome, which gives it a central role in assessing future risks to Europe’s financial system and allows the ECB president to chair a new European Systemic Risk Council for the first five years.

The reaction suggested that the proposed legislation could get more formal backing when EU finance ministers meet in Brussels on Tuesday. The legislation could then be put to the European Parliament this month. EU officials were hoping to have the approval process completed by the end of September so that the new watchdogs can get up and running by January 1.

Banks, Banking, and Crises

By Gary Gorton

Gary Gorton identifies the analogies between what happened to the shadow banking system and classic bank runs — 19th-century-style bank runs. Bernanke thinks that work is very interesting.

Deciphering the Liquidity and Credit Crunch 2007–2008

By Markus Brunnermeier

Brunnermeier at Princeton looks at the dynamics of a panic in the repo market and how that cycle of increasing haircuts in margin worked. And he and others have also done some work in trying to identify systemically critical firms by looking at their financial characteristics. There is some interesting work under way in this area.

Lords of Finance: The Bankers Who Broke the World

By Liaquat Ahamed

Upon reading the Pulitzer-winning book about the Great Depression, Bernanke told the commission, one can’t help but ask: “Doesn’t this seem awfully familiar?”

Liaquat Ahamed’s Lords of Finance is supposed to be a history book about the economics of World War I and the Great Depression. But there is terrific prescience to be found in its portrait of times past. Mr. Ahamed, an investment manager who proves to be a writer of great verve and erudition, easily connects the dots between the economic crises that rocked the world during the years his book covers and the fiscal emergencies that beset us today. He does this winningly enough to make his book about an international monetary horror story seem like a labor of love.

ECB statement: Based on its regular economic and monetary analyses, the Governing Council continues to view the current key ECB interest rates as appropriate. It therefore decided to leave the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 1.00%, 1.75% and 0.25% respectively. Considering all the new information and analyses which have become available since our meeting on 5 August 2010, we continue to expect price developments to remain moderate over the policy-relevant medium-term horizon, benefiting from low domestic price pressures. Recent economic data for the euro area have been stronger than expected, partly owing to temporary factors.

Looking ahead, the recovery should proceed at a moderate pace, with uncertainty still prevailing. Our monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations remains of the essence.

The Governing Council has today also decided to continue to conduct its main refinancing operations (MROs) and its special-term refinancing operations with a maturity of one maintenance period as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of this year’s twelfth maintenance period on 18 January 2011.

Federal Reserve Bank of Dallas President Richard Fisher said Wednesday the recovery of the U.S. economy “will take quite some time,” and that improved regulatory and fiscal policies are needed in order to help the process.

“We need to restore confidence,” he told reporters after giving a speech before the Greater Houston Partnership. “We are not the only one in the pilot house driving this ship, it has to be complemented…with fiscal and regulatory” policies that encourage business owners. He added that any possible new stimulus program should focus on generating jobs.

Fisher, who isn’t a voting member of the interest-rate-setting Federal Open Market Committee this year but will be a voting member in 2011, said that an improved regulatory and fiscal environment should help to activate the economy. Business owners will accept policies they are not “happy” with because at least they will be more certain about the rules, he said.

The U.S. economic recovery, although slow, can’t be compared with the long recession Japan experienced in recent years because both economies are different and governments have reacted in different ways to the same problems. Unlike the U.S., Japan didn’t make substantial reforms to its bank system and it also raised taxes, Fisher said earlier, answering questions from the audience.

Dick Fuld, the ex chief executive of Lehman Brothers argued at the Financial Crisis Inquiry Commission that his investment bank could and should have been saved.

Two years since the collapse of Lehman roiled markets, Fuld mounted his most robust defence yet, accusing regulators in the  of pushing the bank into bankruptcy and failing to get a grip on the crisis early in 2008.

He blamed fellow banks, including JPMorgan Chase, for demanding billions of dollars in cash collateral against credit provided to Lehman in the run-up to its bankruptcy filing in September 2008. He said Morgan Stanley and Goldman Sachs would have failed without state support.

But the Fed hit back, saying it could not have provided funds to Lehman in the middle of a bank run when it did not expect to be repaid.

The US Financial Crisis Inquiry Commission, is expected to report to the nation by Dec. 15 on the causes of the 2008 financial debacle. It is investigating 22 factors, including Asian savings, regulatory failings in the United States, executive pay and credit ratings.

The commission hopes to produce a detailed report that will influence future policy making. It has held 12 days of hearings, interviewed more than 500 witnesses and pored over hundreds of thousands of pages of documents.

But as the commission prepares for its final round of public hearings on Capitol Hill this week — including appearances by Richard S. Fuld Jr., the former chief executive of Lehman Brothers, on Wednesday, and Ben S. Bernanke, the chairman of the Federal Reserve, on Thursday — it faces substantial obstacles.

In May, the commission’s executive director was moved aside and succeeded by an economist from the Fed, a decision that drew criticism since the central bank is an object of the investigation because of its leading role in handling the crisis. In addition, five of the commission’s 14 senior staff members have resigned, including Matt Cooper, a journalist who was drafting the report.

Moreover, the commission’s chairman, Phil Angelides, and vice chairman, Bill Thomas, are finding it challenging to maintain support from all eight other commissioners. While squabbling within the panel has not broken into open dissent, several commissioners are divided over how much to blame specific individuals and banks, how and when to release the documents it has gathered and whether to make available testimony of government officials and bank executives it has interviewed privately.

Thomas said that the law establishing the commission did not mandate unanimity, but “it’s always desirable,” he said.

China will continue to gradually relax restrictions on the use of the yuan, but changes in the currency’s exchange rate won’t resolve China’s massive trade imbalance with the U.S., People’s Bank of China Deputy Governor Hu Xiaolian said Tuesday.

In an interview with The Wall Street Journal, Ms. Hu also said she believes the global economy will continue to recover—albeit slowly—and that she doesn’t expect it to return to a state of recession.

“The global economy is still recovering,” Ms. Hu said. “Sure, there is some volatility but it won’t double dip. But the recovery will be quite slow.”