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G-30 Backs ‘Macro-Prudential’ Tools for Largest Firms

Regulators should consider financial companies’ systemic roles to impose appropriate restrictions on firms whose collapse would cause the most damage, an international group of former and current central bankers said.

So-called macro-prudential tools are needed to ward off another global financial crisis, the Group of 30 said today in Washington. The organization proposed capital and liquidity rules, some of which are already being implemented by international watchdogs, including stricter requirements for the largest lenders.

“Macro-prudential policy is a key missing component in our arsenal of policy approaches,” said Roger Ferguson, a former vice chairman of the Federal Reserve who leads the G-30 working group that issued today’s report. “Interconnectedness of financial institutions can threaten the whole economy,” said Ferguson, now chief executive officer of TIAA-CREF, the New York-based pension manager for teachers and researchers.

The group’s advice was unveiled as financial and economic officials from Group of 20 countries concluded meetings a few blocks away in the U.S. capital. G-20 countries, their regulatory bodies and international rule setters have been negotiating capital requirements and risk limits in the wake of the global credit crisis. While the U.S. and Europe have already adopted many rules, debate continues on some aspects, such as how to rein in the largest financial institutions.

U.S. Risk Council

Some macro-prudential measures were already included in the U.S. regulatory overhaul enacted in July and in international capital and liquidity rules accepted by the Basel Committee on Banking Supervision last year and last month. The U.S. law, known as the Dodd-Frank Act, creates a Financial Stability Oversight Council to help U.S. agencies monitor risks.

The G-30 called for increased capital charges on trading books, the part of a bank’s balance sheet where securities are temporarily held for trading purposes. That was part of Basel’s July 2009 changes to trading-book rules. The G-30 also recommended countercyclical capital buffers, which are being discussed by the Basel committee.

“Measures already announced in Basel III and what’s recommended here are very consistent,” said Jaime Caruana, general manager of the Bank of International Settlements and a member of the G-30 working group. “But Basel is about micro-prudential supervision, looking at individual banks’ risks. We need a macro-prudential approach that builds on that.”

A G-30 proposal to impose higher capital charges on the biggest banks is among measures under discussion at the Financial Stability Board, another international rule setter. Switzerland is in the process of enacting such charges for its two biggest banks. Credit Suisse Group AG and UBS AG will be asked to hold twice as much capital as other Swiss banks, though they may use hybrid debt instruments to meet some of the rules.

“We’re trying to provide an integrated view of how different measures being used in different jurisdictions all fit together,” said Ferguson.

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