WASHINGTON — The blossoming global financial crisis is provoking a consolidation in banking that will leave surviving institutions more powerful than ever, giving greater urgency to new and comprehensive rules and regulations, the influential Group of Thirty said Wednesday in a much-anticipated report.
Composed of some of the biggest names in economics and finance, and led by a top adviser to President-elect Barack Obama, the Group of Thirty called for tough new regulations of the finance sector in the United States and globally.
Many of its recommendations are similar to a blueprint provided last year by departing Treasury Secretary Hank Paulson, and the group carries weight because its members are the current or former presidents of important central banks and the chief executive officers of some of the biggest financial companies. They're no longer calling for self-regulation and want tough and transparent new rules.
"The pervasive and deep-rooted financial crisis has amply demonstrated that our financial system is broken and it requires thoroughgoing repair," Paul A. Volcker, the chairman of the Group of Thirty's trustees, said in a statement that accompanies the detailed report.
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Volcker is the larger-than-life former Federal Reserve chairman who held the post from 1979 to 1987. He crushed inflation in the early 1980s and ushered in two decades of economic prosperity. He's a close adviser to Obama and will become the chairman of a new Economic Recovery Advisory Board after next week's inauguration.
Obama has promised to act swiftly on serious financial revisions, and one member of the influential Group of Thirty is his embattled pick to head the Treasury Department, Timothy Geithner. The presence of Volcker and Geithner in the Group of Thirty adds weight to its recommendations.
Before offering 18 recommended changes to the regulatory structure, the group warned that the deep global financial crisis has provoked failures and mergers that have left a "small number of exceptionally large bank holding companies" at the core of the U.S. financial system.
"These core institutions are gaining even larger dominant positions in terms of credit and capital market activities, large-scale corporate banking, nationwide deposit taking and many other segments of the corporate and retail financial business," the report says, adding that "these developments pose public policy issues, including questions of excessive concentration" that could yield monopoly-like powers.
Among the recommendations is a call to merge regulators so that there's a single one that looks at the largest, most complex banking organizations. These large institutions should be prohibited from commingling their money in private equity funds and hedge funds on the grounds that these private pools of money present high systemwide risks and conflicts of interests, the report says.
Also noteworthy, the Group of Thirty acknowledged that self-regulation of hedge funds, which are private funds for the ultra-wealthy, wasn't enough, since "volatility has been greater than anticipated" and contributed to more uncertainty in financial markets. The group calls for national regulation of private pools of capital if they employ substantial amounts of borrowed money, a process called leveraging.
Echoing a controversial call from Treasury Secretary Paulson, the Group of Thirty also called for national regulation of the insurance industry, saying that the failure of regulation allowed American International Group to capture a large share of an unregulated insurancelike market called credit-default swaps. AIG was on the verge of collapse when the federal government took partial ownership of the giant insurer in September.
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