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MARCH 6, 2009 IMF Urges Global Financial Rules
Group Says Governments Should Regulate Big Hedge Funds, Private-Equity Firms
By BOB DAVIS
WASHINGTON -- The International Monetary Fund urged a new system of government oversight of big hedge funds, private-equity firms and other financial firms whose failure poses a major risk to the global economy, along with other moves to dramatically widen the scope of international financial regulation.
The IMF, which the global recession has turned into a major player in financial rescue plans around the world, is suggesting governments adopt a "binding code of conduct across nations" to coordinate how and when they would intercede in troubled firms, and how to share losses from major financial institutions that operate across borders.
The proposals are aimed at influencing an April 2 summit in London of the so-called Group of 20 leading economies, focused on responding to the global slowdown. The group's summit in November, before the U.S. administration changed over, produced few concrete results. The IMF is looking to craft a compromise among G-20 members, which include the world's wealthiest industrialized countries and also China, India, Brazil, South Africa and other fast-growing developing nations.
The proposals would focus regulatory firepower on hedge funds and other financial institutions that have long avoided publicity and oversight, as European nations have suggested. But the IMF also proposes to limit the number of newly regulated firms to the biggest ones posing "systemic risk," which could placate U.S. objections to new regulation.
Less economically significant funds would face lighter regulation, such as increased disclosure of their financial activities. "We need to regulate systemic risk better, but at the same time to avoid a rush to regulation," said Jaime Caruana, the IMF's top banking official.
The IMF's central role represents a turnaround for the institution, which just six months ago was largely dismissed as irrelevant because few countries needed its loans or wanted its economic advice. Since late fall, it has offered emergency loans to Pakistan, Iceland, Hungary, Ukraine, Latvia and Belarus, while Armenia, Bosnia and Sri Lanka among others are lining up for loans.
The European Union has largely outsourced to the IMF the job of boosting the deteriorating economies of Eastern Europe. If something resembling its regulatory proposals were adopted, it also could end up with a role overseeing the new standards. "The IMF plays a huge role in the international coordination of regulatory policy, which is now a complete vacuum," said Kenneth Rogoff, a Harvard economist who was once IMF chief economist. The organization, funded by 185 member countries, "tends to push ideas with great deal of consensus behind them," he added.
Each of the G-20 nations would have to enact its own rules comparable to the others for any enhanced regulations to operate effectively across borders.
The Obama White House is crafting its own positions on global financial regulation, which it likely will preview at a meeting of nations' finance ministers in London on March 13. So far the U.S. has urged a more aggressive approach than Europe on government stimulus measures, while Germany and France have pushed for deeper regulation than the U.S. on hedge funds and private-equity firms. Britain, which chairs the G-20 this year, generally has sided with the U.S.
The deepening economic slide and election of President Barack Obama have narrowed the differences. At a press conference in Washington on Tuesday with British Prime Minister Gordon Brown, President Obama said the two had discussed how they can "coordinate" fiscal stimulus and "make sure there are a common set of principles, in terms of how we're approaching banking."
House Financial Services Chairman Barney Frank said the White House and congressional leaders want to reach a "conceptual agreement" on how to regulate systemic risks in time for the G-20 leaders' session. The Massachusetts Democrat stressed that that any new standards be globally compatible, but said countries would not concede powers to any new international body.
"There's no supranational standards coming through," he said Thursday. "No one is going to give up their sovereignty."
Attempting to address that concern, the IMF is endorsing a G-20 idea to have financial firms overseen by "colleges of supervisors" -- essentially regulators from a financial firm's home country and other countries where it does business.
The IMF said it needs to do a good deal of work to better define when a financial firm is "systemically important" enough to qualify for a higher level of regulation.
An IMF idea on how to limit the number of institutions labeled as too big to fail may prove the most controversial element. It suggested such institutions would be required to hold more capital, while a panel headed by former Federal Reserve Chairman Paul Volcker, an Obama adviser, would restrict them from certain "high-risk" activities.
Daniel Price, who led G-20 negotiations under President George W. Bush and is now a partner at the law firm Sidley Austin LLP, said such restrictions could backfire by limiting growth of innovative companies, and could reduce the flow of capital to higher-risk developing nations.
The IMF also recommended changes in its own structure to give a bigger ownership stake in the fund to developing nations. It suggested ending the tradition that IMF chiefs are always from Europe. Neither the U.S. nor Europe has approved the proposals.
Such changes could help improve the reputation of the IMF in developing nations and help the fund in its campaign to double its war chest to $500 billion.
Japan has pledged a $100 billion loan. Promising to give developing nations a bigger say in the IMF could help the fund convince China and Saudi Arabia, both sitting on huge foreign reserves, to come up with big money too.
—Damian Paletta contributed to this article
MARCH 6, 2009 IMF Urges Global Financial Rules
Group Says Governments Should Regulate Big Hedge Funds, Private-Equity Firms
By BOB DAVIS
WASHINGTON -- The International Monetary Fund urged a new system of government oversight of big hedge funds, private-equity firms and other financial firms whose failure poses a major risk to the global economy, along with other moves to dramatically widen the scope of international financial regulation.
The IMF, which the global recession has turned into a major player in financial rescue plans around the world, is suggesting governments adopt a "binding code of conduct across nations" to coordinate how and when they would intercede in troubled firms, and how to share losses from major financial institutions that operate across borders.
The proposals are aimed at influencing an April 2 summit in London of the so-called Group of 20 leading economies, focused on responding to the global slowdown. The group's summit in November, before the U.S. administration changed over, produced few concrete results. The IMF is looking to craft a compromise among G-20 members, which include the world's wealthiest industrialized countries and also China, India, Brazil, South Africa and other fast-growing developing nations.
The proposals would focus regulatory firepower on hedge funds and other financial institutions that have long avoided publicity and oversight, as European nations have suggested. But the IMF also proposes to limit the number of newly regulated firms to the biggest ones posing "systemic risk," which could placate U.S. objections to new regulation.
Less economically significant funds would face lighter regulation, such as increased disclosure of their financial activities. "We need to regulate systemic risk better, but at the same time to avoid a rush to regulation," said Jaime Caruana, the IMF's top banking official.
The IMF's central role represents a turnaround for the institution, which just six months ago was largely dismissed as irrelevant because few countries needed its loans or wanted its economic advice. Since late fall, it has offered emergency loans to Pakistan, Iceland, Hungary, Ukraine, Latvia and Belarus, while Armenia, Bosnia and Sri Lanka among others are lining up for loans.
The European Union has largely outsourced to the IMF the job of boosting the deteriorating economies of Eastern Europe. If something resembling its regulatory proposals were adopted, it also could end up with a role overseeing the new standards. "The IMF plays a huge role in the international coordination of regulatory policy, which is now a complete vacuum," said Kenneth Rogoff, a Harvard economist who was once IMF chief economist. The organization, funded by 185 member countries, "tends to push ideas with great deal of consensus behind them," he added.
Each of the G-20 nations would have to enact its own rules comparable to the others for any enhanced regulations to operate effectively across borders.
The Obama White House is crafting its own positions on global financial regulation, which it likely will preview at a meeting of nations' finance ministers in London on March 13. So far the U.S. has urged a more aggressive approach than Europe on government stimulus measures, while Germany and France have pushed for deeper regulation than the U.S. on hedge funds and private-equity firms. Britain, which chairs the G-20 this year, generally has sided with the U.S.
The deepening economic slide and election of President Barack Obama have narrowed the differences. At a press conference in Washington on Tuesday with British Prime Minister Gordon Brown, President Obama said the two had discussed how they can "coordinate" fiscal stimulus and "make sure there are a common set of principles, in terms of how we're approaching banking."
House Financial Services Chairman Barney Frank said the White House and congressional leaders want to reach a "conceptual agreement" on how to regulate systemic risks in time for the G-20 leaders' session. The Massachusetts Democrat stressed that that any new standards be globally compatible, but said countries would not concede powers to any new international body.
"There's no supranational standards coming through," he said Thursday. "No one is going to give up their sovereignty."
Attempting to address that concern, the IMF is endorsing a G-20 idea to have financial firms overseen by "colleges of supervisors" -- essentially regulators from a financial firm's home country and other countries where it does business.
The IMF said it needs to do a good deal of work to better define when a financial firm is "systemically important" enough to qualify for a higher level of regulation.
An IMF idea on how to limit the number of institutions labeled as too big to fail may prove the most controversial element. It suggested such institutions would be required to hold more capital, while a panel headed by former Federal Reserve Chairman Paul Volcker, an Obama adviser, would restrict them from certain "high-risk" activities.
Daniel Price, who led G-20 negotiations under President George W. Bush and is now a partner at the law firm Sidley Austin LLP, said such restrictions could backfire by limiting growth of innovative companies, and could reduce the flow of capital to higher-risk developing nations.
The IMF also recommended changes in its own structure to give a bigger ownership stake in the fund to developing nations. It suggested ending the tradition that IMF chiefs are always from Europe. Neither the U.S. nor Europe has approved the proposals.
Such changes could help improve the reputation of the IMF in developing nations and help the fund in its campaign to double its war chest to $500 billion.
Japan has pledged a $100 billion loan. Promising to give developing nations a bigger say in the IMF could help the fund convince China and Saudi Arabia, both sitting on huge foreign reserves, to come up with big money too.
—Damian Paletta contributed to this article
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