International Bankers Group Calls for More Self-Regulation

The Group of 30, an organization representing multinational commercial and investment banks, called Friday for fundamental changes in the way they are regulated.

Arguing that their international activities have grown too big and complex to be adequately supervised under current regulatory structures, the global bankers recommended a new framework for cross-border supervision with a high degree of self-regulation.

"The marketplace is coming together on a cross-functional and a cross- border basis," said John G. Heimann, chairman of global financial institutions at Merrill Lynch & Co. "The concept here is that the private sector ought to take the first steps to resolve supervisory issues."

The report received immediate support from William McDonough, president of the Federal Reserve Bank of New York, where the Group of 30 released its study.

"We very much welcome the report," Mr. McDonough said. "I am very sympathetic to their conclusions."

The Group of 30 is respected and influential in global policymaking circles. Its 1993 report on derivatives served as the basis for guidelines adopted by the Federal Reserve Board and Office of the Comptroller of the Currency.

One of the group's major regulatory recommendations was for representatives of the world's largest banks, insurers, and securities firms to convene and write risk-management standards that these institutions would voluntarily adhere to.

The report offered few details on what the risk-management policies would be, though it noted that monitoring, staffing, and management oversight were areas of significant concern.

"We should set the best standards for the industry," said Lord Alexander of Weedom, chairman of Natwest Group, London. "This is an attempt to support supervision."

The group advocated umbrella supervision, which means a regulator in one country would monitor a multinational bank's risk-management efforts globally. A bank would still be subject to regulation by supervisors in each country where it operates.

For example, the Federal Reserve would be responsible for overseeing all of Citicorp's operations. But authorities in China also could regulate branches operating there.

Fed Chairman Alan Greenspan has criticized this approach as unworkable, although the concept enjoys wide support from European regulators.

"One of the basic principles of supervision is there needs to be some entity that understands an institution in full," Mr. Heimann said. But he added that an umbrella regulator's mission would be limited to global risk- management reviews.

External audits featured prominently in the report. The Group of 30 urged every globally active bank to commission annual audits of its worldwide operations. This would provide managers with a better indication of the institution's total performance, according to the report.

It also said regulators should adopt a single form to collect data from financial institutions. Mr. Heimann said one global bank, which he did not name, completes 220 disclosure forms a year.

Banks could cut prices if they did not have to devote scores of employees to completing duplicative paperwork, the Merrill Lynch executive added. "This would prove a boon to consumers by cutting costs by a meaningful amount," he said.

The global banking group argued for uniform accounting rules. Current accounting standards vary by country, making it difficult for managers and investors to understand an institution's true financial condition, the report noted.

Because clearing houses are playing an increasingly important role in international banking, the report suggested that regulators adopt risk- management and financial stability requirements to ensure these operations do not collapse.

Finally, the Group of 30 urged governments to reach international accords on the treatment of collateral, insolvency, and netting arrangements.

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