Market squeeze no regulator has the ability to resolve

Market squeeze no regulator has the ability to resolve

http://www.ft.com/cms/s/0/9bad6fa2-625a-11dc-bdf6-0000779fd2ac.html

By Gillian Tett

Published: September 14 2007 03:00 | Last updated: September 14 2007 03:00

Donald Aiken, the head of an industry association representing Europe's money market funds, is feeling perplexed.

Like many financiers, Mr Aiken is horrified by the current interbank market crunch - particularly since he knows that one source of this crunch is the fact that some of his members have stopped buying commercial paper.


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Consequently, he is eager to talk to somebody in power about how to resolve this mess. But what Mr Aiken cannot work out is who on earth - or, more specifically, who in Europe - he should turn to.

A decade ago the Bank of England might have seemed an obvious choice, since the crisis is largely playing out in London. But the Bank of England does not control the euro-denominated markets, which are at the centre of the current storm - and, anyway, many funds are headquartered in Dublin for tax -reasons.

However, the Irish authorities seem ill-equipped to help. And while Mr Aiken could talk to the European Central Bank, the ECB is not in a position to take the type of steps that money market funds want to see, such as moves to force more transparency on banks, since banks across Europe are each regulated by their own national entities.

Nor can the European Commission solve the dilemma: it does not really have any effective pan-European regulatory powers either. "It's a real puzzle who is in charge now," confesses Mr Aiken, with a despairing chuckle.

Welcome to one of the most pernicious problems now haunting markets - namely the utter inadequacy of modern regulatory structures to cope with the shape of 21st-century finance.

For as the credit squeeze continues to bite, it is not just men such as Mr Aiken who are feeling bemused: plenty of policymakers and bankers in Europe and the US are now quietly wondering who - if anybody - is able to step in to calm the markets down effectively.

To a certain extent this reflects the fact that global markets are now more integrated than ever before, as investors - and institutions - hop across borders with ever greater ease. This means that national authorities now look increasingly impotent when they act on their own. (Just look, for example, at the way some British banks are currently getting liquidity from the European Central Bank because the Bank of England has been more tight-fisted)

But the problem of policy impotence has been exacerbated by the fact that credit risk is now more widely dispersed than ever before. Thus, credit problems - and investor panic - can swirl around the world at a speed that constantly leaves national policymakers looking flat-footed.

Behind the scenes, there are plenty of regulators and policymakers who clearly recognise these issues - and accept that policymakers need to increase global co-ordination. And today's meeting of European finance ministers in Portugal is set to take one step in that direction by calling for better transparency in the financial world. Next month's annual meeting of the International Monetary Fund will probably intensify such moves.

But right now most of these available avenues for collective action seem dangerously slow and clumsy. So I would bet that one long-term consequence of the current credit squeeze is that it may soon intensify calls for better forms of cross-border action in the future.

This may include moves to enhance the role of the Financial Stability Forum in Basel, a group attached to the Bank for International Settlements. However, I suspect that we shall also see new calls emanating from Brussels for some form of pan-European regulatory body. Indeed, I am told that initiatives on that front may even emerge later this autumn.

Such moves will undoubtedly provoke plenty of resistance. British regulators, for example, hate ceding power to Brussels, since they fear - probably correctly - that Eurocrats are ill-equipped to understand how markets work.

However, the longer the current crisis lasts, the greater the imperative to start a serious discussion about better platforms for international co-ordination. The only real pity is that this is likely to be too late to help Mr Aiken - or the other bemused investors reeling from the current credit squeeze.