Work toward overhauling the financial system has been hijacked by discussion of a bank tax to fund future bailouts, a JPMorgan Chase & Co. Inc. (JPM) executive said yesterday at a Europlace conference in New York.
Andrew Crockett, president of JPMorgan Chase International in New York, joined executives at other events in New York yesterday in saying that while they feel progress is being made, suggestions including a tax on financial firms to fund bailouts would cause more harm than good. The International Monetary Fund recommended such a levy.
Crockett said there’s agreement the system needs to be bolstered, that “all institutions large and small believe that market disciplines have to apply” to allow big financial institutions to fail without jeopardizing economic stability. He said a tax on banks, advocated in some countries as a way to help pay for future government bailouts, is not a good idea and has “diverted” debate from regulatory changes that would reduce risk in the financial system.
Regulators and legislators in the U.S. and Europe are seeking ways to modify the financial system to ensure that future crises won’t force governments and taxpayers to rescue large institutions teetering near bankruptcy. Possibilities include requiring banks to hold more capital against risks they take on and limiting their proprietary trading. Taxes to fund future bailouts have also been proposed.
“Taxes or levies will not be a substitute for good capital, more capital,” said Jaime Caruana, general manager of the Bank for International Settlements, speaking at a conference yesterday in New York held by Chatham House. “The core elements are capital and liquidity.” Discussions about taxes shouldn’t delay reform on capital requirements, he said.
U.S. President Barack Obama and U.K. Prime Minister Gordon Brown have talked in recent months about a bank tax to fund government support programs for failing financial institutions. The IMF last week proposed a two-pronged tax to be considered at the Group of 20 meeting in June. The report, prepared at the request of the G-20, includes a levy on banks and financial institutions to bail out companies in the future and another on profits and pay at those firms.
Lewis Kaden, vice chairman of Citigroup Inc. (C), said he’s encouraged by the progress on financial reform, based on conversations he’s had with policy makers in the G-20. If it were a nine-inning game, “we’re in the sixth,” he said. Kaden spoke at the Europlace conference.
The idea that no banks should be too big to fail and the need for an agency overseeing systemic risk are “hard to dispute,” Kaden said.
Better regulation is essential to align the risks banks take with their role in the financial system, Caruana said. By the end of this year, BIS’s Basel Committee will come up with new standards specifying the amount and type of capital banks must hold to protect against declines in their assets, he said.
“Larger capital and liquidity buffers are necessary, especially for trading activities,” said Christian Noyer, governor of the Bank of France, in a speech yesterday. He said that making requirements too high could hurt the financial system instead of making it more resilient, and could wind up “reducing loan supply and fostering risk-taking in order to keep a high return on equity” for banks.
Caruana said the Basel Committee and the Financial Stability Board would also encourage accounting reform, which he said should accompany new capital standards.
Jean Lemierre, senior adviser to the chairman of Paris- based BNP Paribas (BNP), said at the Europlace conference that a level playing field for regulation across countries is the “correct answer to globalization.”
Robert Kelly, chairman and CEO of the Bank of New York Mellon Corp., said he agreed with “80 to 90 percent” of the financial reforms being discussed by regulators and bank executives, including that no bank should be too big to fail, the need for a “wind-up authority” for large firms nearing bankruptcy and a systemic risk council.
The financial crisis of 2007 and 2008 revealed that the “average bank didn’t have enough good capital,” Kelly said on a panel with Caruana.
Officials around the globe are working to overcome the challenge that some rules adopted in response to the crisis will have to be implemented and enforced by regulators in different countries, said Ethiopis Tafara, director of the U.S. Securities and Exchange Commission’s office of international affairs. This will require greater cooperation among those supervising markets and broker-dealers in different regions, he said.
Securities regulators are building a framework for “supervisory cooperation” and should be able to resolve current obstacles to sharing information, Tafara said on the panel with Caruana and Kelly. “Philosophic variances” among regulators, including attitudes toward fair-value accounting or national sovereignty, are harder to overcome, he said.
BNY Mellon (BK)’s Kelly said that while international standard for capital requirements and getting to a single accounting standard are important, a resolution authority for failing financial institutions is what’s most critical.
“Everything else is noise at the end of the universe,” he said.
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