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Calls grow for global banking regulator

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Times Staff Writer

The global financial crisis has forced world leaders to do almost unimaginable things in recent weeks, including buying up near-worthless securities and forcing tax dollars on reluctant lenders. Now the Bush administration is considering calls for something the United States and other major powers have long resisted: creating an international system to watch over the world’s banks.

In the words of French President Nicolas Sarkozy, the goal is nothing less than to “recast the capitalist system” in an attempt to prevent another global meltdown.

Reflecting long-standing U.S. skepticism about such ideas, the Treasury Department’s initial reaction to proposals floated this week by French and British officials was negative. As the world slips into a potentially severe recession, however, economists and political analysts said pressure would mount on the United States to accept new international reins on its freewheeling commercial system.

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And if conditions should get dramatically worse, more far-reaching changes may be unavoidable.

After the 1997 Asian financial crisis, the U.S. and its economic partners created mechanisms to more quickly identify and respond to systemic financial problems. Those appear to have failed miserably in the current crisis.

“Really, the system didn’t work. And if you don’t fix the system, it’s going to do it again,” said Simon Johnson, a former chief economist at the International Monetary Fund. Creating a global banking regulator was a farfetched prospect until very recently, but views are changing, he said:

“If you’d asked me three weeks ago, I’d have said you were crazy. But I think everything’s on the table” now.

Few details of how global banking oversight would work have been advanced. But the ideas being discussed involve creating a new regulatory entity or one within an existing institution such as the International Monetary Fund or World Bank that would examine information from global financial institutions. The goal would be to monitor their balance sheets, assets and other data to spot and at least call attention to speculative bubbles, such as the U.S. housing boom that was fueled by subprime mortgages.

Guarding sovereignty

What gives Washington and some other governments pause is that such a system would force countries to give up a measure of national sovereignty over banks operating within their borders. It also could lead to international bureaucrats trying to shape financial policy and possibly taking punitive action.

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Another idea is to bring at least the world’s 30 largest banks under a “college” of regulators from major countries. Such a group might improve supervision and identify broad problems earlier as well as impinge less on the authority of individual nations.

Europeans are calling for an international conference to develop a new global system. “The U.S. will be keen to be seen as talking and cooperating. You can’t have any big multinational rows right now,” said Johnson, now a senior fellow at the Peterson Institute for International Economics. “But this whole issue of giving up their sovereignty is going to be very hard for them. They’re going to have to see much worse things happen first.”

Sarkozy and British Prime Minister Gordon Brown fear the worst is coming and believe the world’s financial structures need a major update. Brown wants to re-create the 1944 Bretton Woods conference -- a gathering of world leaders at a grand New Hampshire mountain resort that rebuilt the global monetary system in the wake of the Great Depression and World War II.

“Ten, 20 years ago, we had national capital markets, we had European capital markets. We now have global financial markets, but what we do not have is anything other than national and regional regulation and supervision,” Brown said during a two-day summit of European Union leaders in Brussels this week.

“We have to show that we are dealing with the problems that caused the events of the last few months in the first place.”

The EU summit concluded Thursday with European leaders vowing to work with other nations “toward a reform of the international financial system and a new world governance.” Sarkozy has said he would like to hold the larger meeting in November in New York, “where everything started.”

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The White House on Wednesday issued a statement from the leaders of the so-called Group of 8 -- Britain, Canada, France, Germany, Italy, Japan, Russia and the United States -- saying they looked forward to meeting with other key countries “at an appropriate time in the near future to adopt an agenda for reforms to meet the challenges of the 21st century.”

Sarkozy and European Commission President Jose Manuel Barroso are scheduled to meet with President Bush at Camp David on Saturday and will push for a quick summit. Though the Bush administration supports the idea of a summit to look at world regulatory systems, it’s not keen on international oversight.

“Ultimately, regulation is undertaken at a national level, though it must take the global context into account,” said Treasury Department spokesman Robert Saliterman. “In this respect, a global regulator is not a realistic approach,” he said, reflecting the traditional American view.

Many ideas are being discussed around the world, he said, including harmonizing policies to deal with countries that act as tax havens, “but we must focus on the immediate issues at hand.”

President’s prerogative

That view may change depending on who wins the White House next month. The next president will have the final say on U.S. participation in a global oversight system.

That makes any rush to develop a worldwide regulatory structure by the end of the year pointless, said Martin Weale, director of the National Institute for Economic and Social Research in London.

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He believes there is a need for an international body that, at the least, would monitor financial stresses in different countries and recommend regulatory approaches.

The United States and leading economic powers in Europe and Asia created the Financial Stability Forum in 1999, after the Asian financial crisis, to do something similar. But Weale said its failure was evident in the current instability.

The United States isn’t the only major economic power that will balk at international oversight. China, for example, probably would have problems with such a regime as well, said Ross Levine, director of the William R. Rhodes Center for International Economics at Brown University.

Still, he predicted that China, like the United States, would participate in an international summit to discuss the issues. And though there’s no harm in discussing ways to increase cooperation and the flow of information among regulators in different countries, Levine said, a single international oversight system could backfire.

“I’m not opposed to international cooperation, but I’m not sure one big international financial regulatory group would have solved the problem or would make things better.”

Levine said that if there had been one singular approach to the current crisis, it might have resembled earlier versions of the Bush administration solution that focused on buying mortgage-backed securities. The more aggressive step that Britain took unilaterally -- pumping cash directly into banks by buying stakes in them -- might never have happened.

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“There’s an example where cooperation and coordination might have led to a worse policy,” Levine said.

Even if there is no new international oversight of financial institutions, the United States and other countries are moving to tighten their own regulations. Congressional Democrats have promised to press for more restraints, and the House Financial Services Committee will hold a hearing Tuesday to look at “broad regulatory restructuring and reform.”

“It is very clear that a failure to regulate the economy appropriately is what led to this mess,” Rep. Barney Frank (D-Mass.), the committee’s chairman, said this week.

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jim.puzzanghera@latimes.com

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