Financial reform: fair & effective – not politicised, thank you

Companies and financial institutions around the world have express strong levels of support for many of the key components of financial regulation reform proposed by governments in the United States and Europe, according to new research published this week by Greenwich Associates.

Greenwich surveyed 458 large companies and financial institutions in North America, Europe and Asia about their opinions on various reform proposals and their assessments of how governments and regulators have performed since the start of the global financial crisis.

The results reveal strong support for a wide range of regulatory proposals from the establishment of “systemic regulators” and the mandatory separation of investment banking and commercial banking activities to the tightening of hedge fund regulations and reform of derivatives markets.  “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. “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.”

The key highlights are as follows:

Systemic Risk Regulator: 49% favored empowering a single government entity to regulate systemic risk and examine any firm that could threaten overall financial stability. Support for a systemic regulator is highest in the United Kingdom (70%) and Asia (68%). Companies and financial institutions in the United States are evenly divided on the issue, with almost 40% in favor. Half of the U.S. respondents said 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 function.

Say on Pay: Large companies and investors have mixed views about greater investor influence on setting pay structures. 43% supported giving investors a greater say on executive compensation, 34% oppose and 23% say they are neutral on the issue. Support for these proposals topped 50% in Asia and the United Kingdom;

Hedge Fund Supervision:  62% supported increasing regulatory supervision and control over hedge funds. Overall, more than 60% of large companies and 58 % of financial institutions responding are in favor of efforts to increase regulatory supervision of hedge fund, including 83% of Canadian respondents, almost three-quarters of Asian participants, almost 65% of European respondents and 55% of U.S. participants;

Separation of Investment Banking and Commercial Banking: Almost half of large companies and financial institutions would support the renewal of regulatory separation of investment banking and commercial banking activities within financial services firms. “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,” said 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.”

According to Greenwich, many of the companies and institutions participating in the survey were quick to point out that they are watching the progress of regulatory reform with a sense of caution, even when they broadly support the specific regulatory proposals in question. An executive at a large Canadian company also captured the tone of many of his peers from around the world when he concluded, “Government regulation works only if it is not political. 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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