Policy-makers pledged over the weekend to purge capitalism of the excess that caused the latest crisis in financial markets. It is a tall order, made taller when governments of the Group of Seven (G7) free-market democracies promised after meeting in Washington to finish much of the groundwork within 100 days, and the rest by year-end.The 100-day deadline, based on recommendations formulated by the Financial Stability Forum (FSF), commits supervisory bodies to set higher capital requirements and tells banks to reveal the full extent of their losses in their first-half earnings reports. Among other things, it also applies to the International Accounting Standards Board, which the G7 said should urgently produce improved ways of valuing assets of the kind that have turned toxic in the latest crisis.They are just a few of the proposals the Financial Stability Forum presented in a drive to rid financial markets of what FSF chief Mario Draghi called the “perverse incentives” behind the recent boom and bust in credit. “We have to find a better balance between market discipline and regulation in our financial system, a better balance between efficiency and innovation and reserves and stability,” New York Federal Reserve Bank president Timothy Geithner added during a news conference with Draghi and other top officials.So far banks have report losses and asset writedowns of more than $200 billion dollars from the crisis that started with defaults in the US mortgage market but snowballed last August as investors turned their back on mortgage-backed securities and many of the more exotic derivatives that were all the rage during a five-year credit boom.POISON-PRICINGHow to value assets in markets that are no longer liquid goes to the heart of what the current credit crunch, now in its ninth month, is all about. But not everyone is rushing to write off the G7 initiative, at least while the ink was drying on the reform plan, which the policy-makers said was about making the system safer for the future rather than providing a fast fix to the current turmoil.“If they are followed through, they will give a crucial contribution to restoring calm in the markets, but within the 100 days indicated, not within a few days or weeks,” said Marco Annunziata, chief economist at Unicredit, an investment bank.“Will they help? I think so because it is good to have a policy framework to get out of the problems,” Pierre Cailleteau, chief strategist at Moody’s Investor Service, one of the ratings agencies at the eye of the storm over high grades they gave to now toxic assets, said.‘Leadership & clear thinking needed’Banks are in a bind because they want public authorities to help them get out of the mess but they fear the price to be paid will be heavier regulation. “Long-term economic growth prospects depend importantly on the design of the financial system and some of these G7 proposals have a flavor of over-regulation,” said Torsten Slok, economist at Deutsche Bank in New York.Among other proposals the G7 group want adopted by year-end is the creation of tailormade “colleges of supervisors” for each of the world’s leading international banks, which would enter direct contact on a regular basis with top bank management. The dilemma governments face, however, is how far they can ensure better risk control with or without regulation when the financial markets innovate faster than many can fathom.Nout Wellink, the Dutch central banker who heads the Basel Committee on banking supervision says supervisors may be partly to blame for not heading off the latest crisis but this means they should perhaps now be a bit more “aggressive.”“Better regulation as recommended by the FSF will help, but the idea that this will tame the greed and fear cycle and police financial innovation is overly optimistic,” said Cailleteau at Moody’s.Just how it all pans out is anyone’s guess but none of the policy-makers behind the latest drive to reform the markets said they could dream of insuring against crises in the future.
