Corporations and financial institutions around the world strongly support the idea of financial regulation reform proposed by the U.S. and European governments. However, they are divided on proposals that would create a government entity to regulate systemic risk, according to a recent survey.
Greenwich Associates’ Market Pulse survey of 458 large corporations and financial institutions in North America, Europe and Asia finds that support for a systemic regulator is highest in the U.K. (70%) and Asia (68%). In the U.S., almost 40% of respondents are in favour of such an entity, while the same proportion is opposed and the remainder neutral. Overall, 28% of respondents say they would not support the establishment of a systemic regulator.
“There is a consensus among many of the world’s largest companies, investors and financial institutions that the current regulatory framework has been proven inadequate and must be rebuilt,” says Greenwich Associates consultant John Colon. “However, the results reveal that while these important private sector entities recognize the need for reform, the details of the new regulations will determine their ultimate reactions. Companies and institutions are willing to support reforms they see as smart, effective and fair, but they are ready to oppose regulations they perceive as overly blunt, broad or politicized.”
Almost 65% of European respondents believe that the proposed European Systemic Risk Council (or a similar systemic risk regulator) should have the power to implement policies directly, while slightly more than 35% believe that such an entity should act in a strictly advisory capacity. In the U.S., half the respondents indicated that the power of systemic regulation should be granted to the Federal Reserve, while more than 35% said the government should create a new entity for this important function.
In a nod to Canada’s banking sector, the regulatory separation of investment banking and commercial banking activities within financial services firms was supported by almost half of large companies and financial institutions.
“There seems to be a general consensus that risk-taking in the investment banking function of banks and other financial institutions caused the balance sheet problems that in turn disrupted loan markets,” says Greenwich Associates consultant Frank Feenstra. “Companies and financials alike seem to believe that the restoration of a division between these activities would help to limit the risk of trading losses having a significant impact on credit markets and the broad economy.”
The recent negative attention on the hedge fund industry is evident in the survey results, with more than 60% of large companies and 58% of financial institutions in favour of increased regulation and control over hedge funds. A similar number (65%) favour the shift from over the counter (OTC) to exchange-based trading, including 70% of U.S. companies and financial institutions. Proposals that would centralize the clearing of OTC derivatives trades received even stronger support, at with almost 70%.
“Say on pay” is revealed to be a divisive issue for respondents, with 43% supporting so-called “shareholder say” proposals, 34% opposing and 23% saying they are neutral on the issue. And almost 65% of large companies and financials support a proposal that would prevent originators from selling off entire amounts of asset-backed or mortgage-backed securities by requiring them to hold a minimum proportion of new issues.
The overall tone of respondents was one of caution, according to Greenwich. “Government regulation works only if it is not political,” says an unnamed Canadian executive. “My overall concern for regulation is to separate politics from regulation, as the two do not mix to provide for efficient markets.”
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