Markets

Will the Financial Summit Create a Global Regulatory Cop?

By Peter Galuszka

Updated on: November 6, 2008 / 10:46 AM EST / MoneyWatch

In slightly more than a week's time, leaders of 20 nations will gather in Washington for a financial crisis summit that could lead to a new global securities cop, a "constitution" for regulating banks and investments and much greater cross-border cooperation a world finance community that grows ever tighter.

Some analysts believe the Nov. 14 and 15 summit could lead to a 21st century version of the key Bretton Woods conference in 1944 which created the International Monetary Fund and World Bank. Others believe efforts will be stymied since China will resist international regulation and conference host George W. Bush is a lame duck. President-elect Barack Obama hasn't been invited.

Nevertheless, the possibilities could be far-reaching. Among the proposals are that tax havens be curtailed with new international agencies, that hedge funds get a global spotlight and that financial executives pay packages be regulated. A major advocate for such activist measures is French President Nicolas Sarkozy, Europe's most prominent global financial reformer.

Whatever happens, there is no question that the sub prime mess in the U.S. has spilled across borders forcing major government bank bailouts in Europe, and major stock market drops in Japan and new skittishness about China's hard-charging economy.

Some initiatives are already underway that could be beefed up. These include:

Increasing globalization of securities regulation. The U.S. Securities & Exchange Commission has created new relationships with its counterparts in the United Kingdom, Australia, Italy, Canada and other countries. However, the future of the SEC is not sacrosanct since it has come under fire for the financial mess and could be merged into another regulatory agency.
Merging world accounting systems. Plans are to allow U.S. firms to gradually adopt the International Financial Reporting Standards (IFRS) used by most of the world in lieu if U.S. Generally Accept Accounting Principles (GAAP). One system will allow for more financial reporting transparency and easier regulation.
Accounting summits. The day of the Washington summit, another will be held in London by the International Accounting Standards Board (which oversees IFRS) and the U.S. Financial Accounting Standards Board (which oversees U.S. GAAP). It is the first in a series to examine how accounting systems can be improved to ease the financial crisis.
More Central Bank coordination. The Europeasn Central Bank, the Federal Reserve and others have made coordinated interest rate cuts in recent weeks to kick-start economies and unfreeze credit.
A new role for the International Monetary Fund. The IMF could get expanded powers to monitor off-the-books securities such as credit default swaps.

A major impediment to global regulation is the insistence by some countries that they have the sovereign right to police their financial systems. The Chinese are especially outspoken on this point and the Bush Admininstration has leaked that it is against a global securities cop.

But it's also obvious that doing nothing is not an option given how quickly financial problems spread in a greatly intertwined global economy. And, Bush will be gone in two and a half months.