Erratic global reforms tempt next banking crisis

HONG KONG/LONDON/WASHINGTON Thu Mar 3, 2011 12:14pm EST

Jeffrey Sprecher Chief Executive of ICE speaks at the Reuters Exchanges and Trading Summit in New York March 30, 2010. REUTERS/Natalie Behring

Jeffrey Sprecher Chief Executive of ICE speaks at the Reuters Exchanges and Trading Summit in New York March 30, 2010.

Credit: Reuters/Natalie Behring

HONG KONG/LONDON/WASHINGTON (Reuters) - Quirks in the way countries implement global pledges to toughen up financial rules may cause regulators to hit the wrong targets while failing to prevent another crisis.

Regulators, bankers and exchange heads told the Reuters Future Face of Finance Summit that new rules such as the Dodd-Frank reform of Wall Street will only be effective if they are matched globally.

A patchy rollout will also trigger regulatory arbitrage, sending money and talent flowing to the friendliest sectors, while putting firms in the strictest regimes at a disadvantage in the global capital markets.

"Dodd-Frank will really work if the rest of the world follows the bulk of what we do here," IntercontinentalExchange Inc (ICE.N) Chief Executive Officer Jeffrey Sprecher said.

That is a tall order, despite efforts by the Group of 20 leading economies to coordinate their actions.

Differing political appetites for change mean that the United States is pushing ahead with a tougher line on reshaping trading rules, while Europe is pressing down harder on bonuses.

Asia, meanwhile, fared relatively well during the crisis and is enjoying the luxury of taking its time to decide how to implement change. As a result, it is likely to end up with a more buoyant financial sector backed by heady economic growth.

For banks, discrepancies equal alternative opportunities.

"I think the area in my mind that sticks out as probably the least regulatory is the Asia-Pacific region," said Chris McWilton, head of MasterCard Inc's (MA.N) U.S. markets. "It seems to be in that go-go cycle, and it seems to be very pro-business."

The quirks are another symptom of how economic power is shifting east and the United States -- and to a lesser extent the EU -- can no longer dictate the regulatory agenda.

"I don't think it's realistic to think that everybody is just going to uniformly adopt the same level and type of regulation that we have here," said CME Group Inc (CME.O) CEO Craig Donohue. "That's the biggest concern."

BONUSES AND BASEL

Bank bonuses are one area where regional differences are already hardwired in law, even though the G20 made the approval of a global approach one of its first priorities.

"This is an area where regulatory competition could be very damaging," said Andrea Enria, chairman of the European Banking Authority.

Europe has the world's toughest curbs on bonuses. The United States has stuck to the weaker G20 line, while Asia is bemused.

"The G20 agreement on remuneration was just words," said Angela Knight, CEO of the British Bankers' Association. "The U.S. is very broad brush, much less tight targets and clawback arrangements, and in the Far East they wonder what on earth the issue is all about."

Industry lobbyists say the variations may trigger top bankers to move into the so-called shadow banking sector of hedge funds and private equity, or decamp to another region.

On boosting bank capital, world leaders agreed in November on a set of far more detailed rules than they did on bonuses, but there are signs that countries are implementing this Basel III accord at different speeds.

Britain, Switzerland and the United States want banks to comply earlier than the Basel III start date. Germany and France want liquidity elements tweaked, while Asia, almost smugly, says it basically complies already.

The Basel rules are being phased in over several years from 2013 to roughly triple to 7 percent the minimum core capital a bank must hold to withstand shocks and leave taxpayers off the hook in the next crisis.

"I do worry about capital," said Federal Deposit Insurance Corp Chairman Sheila Bair. "There seems to be robust debate in Europe particularly about the wisdom of some of the Basel III agreement."

The ability of the United States to lecture has weakened, however. The nation played a key part in an earlier round of regulatory arbitrage by not applying Basel III's predecessor, which it argued would have weakened U.S. banks' capital cushions.

STAY CLOSE ON DERIVATIVES

Derivatives are another area where nuances are emerging. The United States so far is taking a harder line than the EU on pushing these securities onto exchanges and clearinghouses, while Asia, again, watches from the sidelines.

"We are a little further along than other countries, and it will be very important for us to continue to stay very close so that we don't find that regulatory arbitrage becomes an issue again," said U.S. Securities and Exchange Commission Chairman Mary Schapiro.

Other industry sectors, like hedge funds in Hong Kong, want better coordination so they don't have to register with regulators at home and wherever else they operate.

"If I don't have the same symptoms, why am I eating the same medicine?," said Christophe Lee, a managing director of FrontPoint Partners and head of the Hong Kong chapter of the Alternative Investment Managers' Association.

Few truly believe regulatory arbitrage can be totally erased, whatever the actions of the G20 and its regulatory henchmen, the Financial Stability Board.

"It's almost inevitable that some of the outcomes won't quite be what was intended," said Martin Wheatley, CEO of Hong Kong's Securities and Futures Commission. "I think it's important to retain the flexibility (to) rein back or change structures as necessary."

Differences are almost a badge of honor for some lawmakers. "I don't desire one-world government," said Jeb Hensarling, a Republican vice chairman of the U.S. House Financial Services Committee. "I would not embrace the idea that all regulatory arbitrage is bad."

(Additional reporting by Jonathan Spicer in New York; Editing by Lisa Von Ahn)

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