Bankers and regulators in the UK and Asia attacked US rhetoric on financial regulation as a leading Wall Street executive confronted the Federal Reserve chairman over US policy.
Jamie Dimon, chief executive of JPMorgan Chase, questioned Ben Bernanke, Fed chairman, at an Atlanta conference on Tuesday and suggested that a slew of regulations – such as plans for an additional capital charge for large banks – were hurting the economy.
“Has anyone bothered to study the cumulative effect of all these things?” Mr Dimon asked. “And do you have a fear, like I do, that when we look back and look at them ... they will be a reason that it took so long that our banks, our credit, our businesses, and most importantly, job creation started going again?”
Mr Bernanke replied: “I can’t pretend that anybody really has. . . . We don’t really have the quantitative tools to do that.” But the Fed was trying to produce rules that “do not unnecessarily impose costs or unnecessarily constrict credit”, he said.
In London, there was fury at the claim by Tim Geithner, US Treasury secretary, on Monday that the UK had set a “tragic” example through light-touch regulation, with officials arguing that the US’s hands-off approach to derivatives and investment banks before the 2008 crisis had been worse.
Alexander Justham, a senior official at the UK’s Financial Services Authority, told a London conference on derivatives: “Clearly he wasn’t referring to derivatives regulation because as far as I can recollect there wasn’t any in America at the time.”
Anthony Belchambers, chief executive of the Futures and Options Association, pointed to the US Securities and Exchange Commission’s record, whose oversight of investment banks and failure to stop fraud has drawn widespread criticism.
“The SEC, arguably, was an equally tragic failure – and by a regulatory authority that was notably heavy-touch but also in some areas no-touch,” he said.
In Asia, market participants were exercised by Mr Geithner’s pronouncement that it was essential for Asian jurisdictions to fall into line with the US on derivatives regulation.
The Monetary Authority of Singapore robustly rejected any suggestion that it was weak on regulation, arguing its banking and derivatives trading rules met or exceeded international norms. It insisted US fears that Singapore would seek to undercut a tough US regime were misplaced. “Singapore has not sought to lure financial business away from other centres through regulatory arbitrage,” it said.
The Hong Kong Monetary Authority agreed that international co-operation was important but said that banking supervision in the Chinese territory was already tighter than international standards.
Despite criticism of the speech, regulators broadly agreed with Mr Geithner’s call for harmonisation, as agreed by the Group of 20 nations.
The Bank of England said: “We are in the process of developing a robust regulatory regime in the UK. In a world of global capital markets, this is a shared enterprise.”
The dispute among regulators reflects differences in the global approach to derivatives trading since the Group of 20 agreed in the wake of the crisis that standardised over-the-counter derivatives trading should move on to exchanges and pass through central clearing by the end of 2012 to reduce systemic risk.
However, while only a fraction of the notional $600,000bn of outstanding over-the-counter derivatives contracts represents business done in Asia, regional financial centres have made clear that they see the sector as a legitimate area for expansion.
The Singapore Exchange moved quickly to set up both trading and clearing facilities for derivatives contracts, and Hong Kong Exchanges & Clearing, the parent body of the Hong Kong Stock Exchange, has made clear that it plans to go down the same route.
In itself, this ought to be uncontroversial because the Asian exchanges are operating in line with the G20 agreement, even though neither is a member of the body. But the problem lies in differences on how to deal with transactions, which are unsuitable for trading on exchanges or for central clearing.
In the US, the Dodd-Frank legislation that was adopted after the crisis imposed a global code of conduct on US banks that will force them to demand collateral from parties to uncleared derivatives contracts – wherever the business is done.
There are no such proposals in Asia, so US banks would be at a disadvantage in the region.
As a result, US banks and brokers have angrily warned the Obama administration that they risked losing substantial business.
“We see enormous growth in the [Asia] region and firms are making huge investments to take advantage of that growth; Singapore may well be the winner,” says John Damgard, president of the US Futures Industry Association, which represents banks and brokers in derivatives markets.
One way out of the dispute would be for the G20 to reach a further agreement on derivatives, which Singapore and Hong Kong would abide by.
“Going forward, Hong Kong would continue to adopt, and where appropriate exceed, internationally agreed supervisory standards in order to ensure the continued resilience of our banking sector and that we contribute fully towards global financial stability,” the HKMA said on Tuesday.
MAS also said it would “ensure that its clearing infrastructure will meet any enhanced future international standards”.
However, there would probably be stiff resistance to pressure on Asian jurisdictions to adopt US regulations because of the widespread resentment among Asian regulators at US suggestions that they are a soft touch when it was lax oversight of the shadow banking system in America that was at the heart of the financial crisis.
This is a point that is made regularly in private by Asian central bankers and regulators. Others put it more bluntly. “I see this as an attempt to bully the rest of the world into creating a level playing field [for US banks] based on something created by Dodd Frank,” says another Asian market participant.
Additional reporting by Robert Cookson in Hong Kong