Banks and investment banks whose health is crucial to the global financial system should operate under a unified regulatory framework with “appropriate requirements for capital and liquidity”, according to Timothy Geithner, president of the Federal Reserve Bank of New York.
Writing in Monday’s Financial Times, Mr Geithner, a key US policymaker throughout the credit crisis and one of the main architects of the rescue of Bear Stearns, says that the US Federal Reserve should play a “central role” in the new regulatory framework, working closely with supervisors in the US and round the world.
“At present the Fed has broad responsibility for financial stability not matched by direct authority and the consequences of the actions we have taken in this crisis make it more important that we close that gap,” Mr Geithner says, in an excerpt of a speech to be delivered today at the Economic Club of New York.
The credit crisis has heightened pressure on US policymakers to consider sweeping changes to a regulatory system for financial institutions which has commercial banks such as JPMorgan Chase and Citigroup regulated by the Fed and investment banks such as Goldman Sachs and Lehman Brothers more loosely regulated by the Securities and Exchange Commission.
Mr Geithner called the system “a confusing mix of diffused accountability, regulatory competition and a complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion”.
However, legislation to overhaul US financial regulation is unlikely to start advancing through Congress until next year when the new administration takes office.
In his speech, Mr Geithner will also say the Fed is examining whether to make “permanent” some of the new liquidity facilities put in place during the credit crisis, and called for central banks to establish a “standing network of currency swaps, collateral policies and account arrangements” to bolster liquidity during a future crisis.
Meanwhile, Malcolm Knight, the general manager of the Bank of International Settlements, the Basel-based central banking group, told the FT that the financial system now faces a growing risk of exchange-rate volatility as investors and central banks grapple with the impact of rising commodity prices and other inflationary pressures.
“It is not clear if the rest of the world is going to continue to fund the US current account deficit at current levels of exchange rates,” he said. “The pattern of the exchange rates is subject to considerable uncertainty now.”
The comments are likely to be closely watched by investors and policymakers, since they come at a time of renewed market focus on the outlook for the dollar relative to the euro and other currencies. Last week, Ben Bernanke, Fed chairman, broke with the US central bank’s traditional silence on currency matters to make clear that it does not want any further dollar weakness.
While the dollar rallied on Mr Bernanke’s remarks, it retreated later in the week after European Central bank comments suggested an interest rate rise and as the price of crude oil soared, heightening inflation fears.
“There is a perception that after a long period of quiescent inflation, things are changing,” Mr Knight said. “This is quite visible in terms of commodity prices in energy markets but also in terms of what is happening with other commodities too.”