Washington — Having enacted a comprehensive financial reform law, the United States is calling on other nations to move “decisively and rapidly” on measures to make their financial systems sounder and more resilient.
The passage of the Wall Street reform bill lays the foundation for a system “less prone to destabilizing bubbles and panics, and one that is more open to a stronger and more competitive real economy,” a top Treasury official told the Peterson Institute for International Economics, a policy research group.
“The challenge before us now is to ensure that the world’s standards are every bit as strong as America’s,” because the interconnectedness of financial firms and markets makes tough national regulations less likely to be effective without similar standards around the world, Lael Brainard, Treasury undersecretary for international affairs, said July 26.
She said global regulatory convergence is essential for such issues as capital standards and the treatment of derivatives. In other areas, she said, it is better to agree on common principles to guide what will likely be different approaches taken by different countries. “These approaches will reflect deeply rooted differences in national institutions and business models,” she said.
Brainard said tougher capital standards — “harmonized internationally” — are particularly important for ensuring a more resilient global financial system.
The Basel Committee on Banking Supervision, a group of policymakers from 27 countries, has been working for some time to find a common position among central banks and national regulators on toughening banking standards to avoid another financial crisis. The committee announced a partial agreement on the day Brainard spoke, but the agreement did not include the most controversial issues, such as how much in capital reserves commercial banks would be required to hold and what levels of debt they would be allowed to use in their operations.
An agreement by the Basel Committee on those standards is expected by the end of 2010, Brainard said.
Brainard also addressed the most pressing issue for governments and central bankers in developed countries: When can you withdraw the money recently pumped into financial systems without endangering the economic recovery? Countries around the world have accumulated large budget deficits because they pushed through public spending programs to mitigate the recession in 2008 and 2009. Now, international groups and private-sector economists voice concerns that, without credible plans to restrain public spending, government deficits may jeopardize fiscal stability in the medium term.
Brainard said the Group of 20 summit in Toronto in June agreed on principles and on specific milestones toward fiscal sustainability.
But the pace of pulling economic stimulus back “has to be carefully calibrated” as different countries make decisions based on the state of their economies and overall global conditions.
“We have to be careful not to have an overly accelerated withdrawal,” she said.
The steps toward fiscal austerity taken in Europe, particularly in Germany, in the wake of the Greek crisis have caused worries that the euro-zone countries may go too fast with their withdrawal and may threaten economic growth and worsen global trade imbalances as a result, according to a June paper by the Peterson Institute of International Economics. (See also “Euro-Zone Crisis No Threat to U.S. Recovery.”) The United States, however, has been urged by the International Monetary Fund and some academics to come up with a more aggressive plan to tackle its budget deficit and national debt.
The text of Brainard’s remarks is available on the Treasury Department website.
(This is a product of the Bureau of International Information Programs, U.S. Department of State)