January 24, 2010
Banks prepare for battle over US reforms
After the Democrats’ electoral defeat in Massachusetts last week, President Barack Obama beefed up both the substance of financial reform and the rhetoric designed to sell his policies, but stopped short of a change of personnel.
This week the substance will come under threat, the rhetoric remains unproven and the two top US economic officials face threats to their jobs that are outside the president’s control.
At the World Economic Forum session which starts on Wednesday at Davos, the world’s largest banks plan to lobby against an aggressive implementation of the Obama plan that would force groups to choose between taking insured deposits and running their own trading operations.
In particular, some senior financiers will argue that the banks’ proprietary activity was not a key source of the recent credit crisis – and thus should not be aggressively targeted. They will also argue vociferously against the idea of breaking up large financial institutions, and insist that there should instead be a concerted effort to tackle the “too-big-to-fail” issue through other means.
Bankers will be seeking to press their case subtly. A crucial plank in their strategy will be to shift the debate to international bodies such as the Group of 20 or Basel committees – and to argue that regulators need to take a co-ordinated approach to curbing systemic risk, and the too-big-to-fail problems, rather than national clampdowns.
The Davos summit is also likely to be used by international regulators to try to forge a common front and rebuff suggestions that Obama’s move has undermined the G20 financial reform process.
In recent days, top regulators with ties to the Basel committees – a body of international regulators linked to the Swiss-based Bank for International Settlements – have argued that the Obama measures are included in the options now under consideration for widespread adoption by the Basel committees and Financial Stability Board.
That implies that any reforms implemented by America may not necessarily be out of line with those eventually adopted elsewhere in the G20.
But after the British government indicated over the weekend it was unlikely to support the Obama move, banks have a chance in Davos and in Congress to help overturn the plan.
The Senate, where staffers have begun considering how the more aggressive bank reform could be introduced to the existing regulatory overhaul, is the venue for two related dramas involving Ben Bernanke, Federal Reserve chair-man, and Tim Geithner, Treasury secretary.
Last week’s uncertainty over Mr Bernanke’s confirmation receded yesterday as Mitch McConnell, the Republican leader in the Senate, predicted that the Fed chairman would be confirmed for a second term in spite of some vociferous opposition from both Democrats and Republicans.
Administration officials expressed renewed confidence that they had secured sufficient votes after a stormy end to last week that saw institutional investors and Senate supporters rush to shore up Mr Bernanke’s prospects.
Mr Bernanke, first nominated by President George W. Bush, is joined by Mr Geithner, who also served in the Bush administration, in taking bipartisan fire from Congress.
Both men were widely praised for an agile response to the global credit crisis. But critics have since focused on the bail-out of AIG, the insurance group, contending that the rescue unnecessarily diverted public funds to the private sector.
The Treasury secretary is due to appear on Wednesday at a House oversight committee hearing that will consider whether the Federal Reserve Bank of New York acted properly during the rescue of AIG.
He has consistently said that he was not involved in deciding to pay par value to AIG’s counterparties, but the political theatre of Mr Geithner being cross-examined by Republican congressmen may matter more than the substance – just as Mr Obama’s rhetoric may ultimately count more than his latest regulatory plans.
AFP
