Goodhart, Crockett Say Authorities Must Deliver New Bank Tools

By Caroline Binham

July 2 (Bloomberg) -- Banking authorities around the world need to make good on pledges to enhance monitoring of financial threats and introduce tools to prevent further crises, former central bank policy makers said.

While governments and regulators agree on the need for so- called macro-prudential oversight and instruments, little meaningful action has followed, researchers including former Bank of England policy maker Charles Goodhart and former Bank for International Settlements General Manager Andrew Crockett said in their “Geneva Report” today.

Governments, regulators and central banks are revamping rules to prevent a repeat of the worst financial crisis since the Great Depression. While plans exist at national, regional and global levels for greater oversight, there is disagreement on who will do it and what tools to use. The U.S. released a report suggesting regulatory overhaul last month.

“Policy makers initially embraced the idea with enthusiasm,” the authors said in a statement. “Yet despite much talk of the need for macro-prudential regulation and its cousin, systemic risk regulation, it is hard to find any detailed macro-prudential regulation in the U.S. administration’s recent white paper.”

President Barack Obama last month proposed a systemic-risk council for the U.S., giving the Federal Reserve responsibility to identify and regulate companies too big to fail. Federal Deposit Insurance Corp. Chairman Sheila Bair has said her agency also needs to be involved in the monitoring of system-wide risk.

‘Soap Opera’

Macro oversight and micro-prudential regulation, or supervision of individual banks, must be done by separate agencies, Goodhart and Crockett said. Central banks should be tasked with systemic oversight while regulators should do institution-specific supervision, it said.

In the U.K., Gordon Brown’s government is deciding whether the Bank of England or the Financial Services Authority should lead systemic oversight. Media reports on the debate resemble a “soap opera,” FSA Chairman Adair Turner said two days ago. He described macro-prudential oversight as “the great cliché of this crisis.”

Turner has proposed that the central bank should chair an oversight committee and have majority membership of it, with the FSA contributing both analysis and reports. He has also said that the FSA should also have a statutory role for financial stability as the bank was given this year.

European Union leaders have backed plans for a European Systemic Risk Board of central bankers and regulators to share information and monitor hazards that cut across borders and industries.

EU Disagreement

European “authorities have yet to convince member governments that macro does not mean national, despite the existence of a monetary union,” said the authors, who include Markus Brunnermeier and Hyun Song Shin of Princeton University and Intelligence Capital Ltd. Chairman Avinash Persaud.

The Geneva Report endorses macro rules including counter- cyclical capital requirements. This means banks are forced to hoard capital in good times to draw down upon in bad.

Spain already has these rules in a practice known as dynamic provisioning. The U.K. told banks in January that it would move to a similar system. The extra buffer doesn’t count toward minimum ratios of shareholder equity.

The Geneva Report’s draft version was released in January. In a speech in February, Andrew Haldane, the Bank of England’s executive director for financial stability, endorsed the report’s recommendations for more use of bank stress tests to take account of spillover effects from other institutions during a crisis.

To contact the reporter on this story: Caroline Binham in London at cbinham@bloomberg.net