Despite the volume of the ‘currency war’ rhetoric, the G20 meeting in Seoul turned out to be of little consequence for markets. Less was heard of another strand to Seoul proceedings that will have some influence, on so-called Sifis, but the speed of progress is likely to match that of drying cement.
What happened? The Financial Stability Board reported to the G20 “on progress and next steps in the implementation of the G20 recommendations for strengthening financial stability”.
The G20 endorsed the Basle Committee’s new bank and liquidity framework (Basle III) with the same enthusiasm that it signed off on Basle II, as well as endorsing the FSB’s framework for reducing the risks posed by systematically important financial institutions (Sifis).
Helpfully the FSB has come up with the more precise subdivision of Sifi: the G-Sifi, which is a financial institution that is “clearly systemic in a global context”.
It is all very well-meaning: early on, the report declares that it “sets out recommendations for improving the authorities’ ability to resolve such institutions in an orderly manner, without exposing tax-payers to loss, while maintaining continuity of their vital economic functions”.
So far as I could work out (when my eyes were not glazing over), there should be some meat on the bones – determination of which institutions are G-Sifis and the “magnitude of additional loss absorbency” they should maintain – by mid-2011.
The whole regulatory movement has a self-righteous, holier-than-thou feel about it at the moment – especially when you consider the exemplary management of Fannie Mae and Freddie Mac. But no one can foresee all the consequences of the new regime and there are bound to be plenty of unintended ones.
Peter Lupoff of Tiburon Capital, in an excellent article written on systemic risk, starts by quoting St. Bernard of Clairvaux: “The road to hell is paved with good intentions”. Lupoff argues that governments have always had a mandate (and the means) to prevent micro-prudential outcomes – risks to individual firms. More, he points out that it could be said that “the crisis was due more to forces emanating from government. This view sees government as the more serious systemic risk in the financial system; it leads to proposals to limit the powers of government and the harm it can do”.
Just as history is always written by the victors, legislation is always written (and blame determined) by the government.
Talking of matters of government, regulation and markets-out-of-control, this week, when Ireland momentarily escaped his attention, Michel Barnier, the EU’s financial services commissioner has again been deploring commodity speculation. Barnier echoed the sentiments of the French president and German chancellor when he railed against what he saw as excessive volatility in agricultural commodity markets. Meanwhile, Dacian Ciolos, the EU’s agriculture commissioner, reckoned the 60% spike in wheat prices since mid-year was “disproportionate”. Ciolos didn’t make clear what price increase he felt would have been proportionate in the face of a Russian drought (and six-month ban on grain exports) and Canadian floods, but doubtless the comment played well to his audience.
Lastly on the regulatory front, the Federal Reserve Board will shortly invite comments on Volker rule conformance “within 45 days after [its] publication in the Federal Register, which is expected shortly.”
A more sane definition of proprietary trading would be a start. Strict adherence to the current definition would mean the death of markets as we know them, banks’ share prices destroyed and tax revenues from banking activities vanishing. The current definition in Dodd/Frank is: “purchasing or selling, or otherwise acquiring or disposing of, stocks, bonds, options, commodities, derivatives or other financial instruments” unless the activities are conducted “on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of customer relationships, including hedging activities”. There’s no scope for trading whatsoever in that. The greengrocer can buy apples to sell later but don’t you go selling EUR/USD just because you think the euro is in meltdown.
