New principles and standards for bank regulation are a good first step, but there needs to be an international body that reviews them with an eye to safeguarding the global financial system, says former prime minister Paul Martin.
"No global regulator can regulate all the banks, that's crazy," Mr. Martin said in an interview Wednesday. "But we have to have somebody who can say that national regulation is up to snuff, and that each country's national regulation is good enough they're not going to cause us a huge problem."
That body must have the power to impose itself not only on G20 countries but on the much broader membership of the International Monetary Fund, he suggested. The powers could be given to the 186-country IMF itself or to the Financial Stability Board, a group of regulators and other officials that has the backing of the G20.
"There are many ways of skinning this cat," Mr. Martin said. "My view is you should have a three-party peer review, where three countries not connected to you are appointed to come in and look at your regulation."
The goal wouldn't be to ensure that each country regulates in the exact same way, but rather to ensure that they comply with minimum standards, he suggested. The peer review would be turned over to the international body, and it would decide whether changes are required to that country's system.
"These people would have to be regulators whose only goal is to prevent systemic risk," Mr. Martin said. "So their only responsibility would be to say 'I wonder if the way Brazil's banks are now operating is going to cause a problem.'"
Mr. Martin gave a luncheon speech in Toronto Wednesday, where he said there is an urgent need for the Group of 20 to confirm at its June summit that new equity and leverage standards will be in place for the world's banks by early fall.
"Bankers, their shareholders and creditors must understand that a system whereby financial institutions take excessive risks and earn excessive profits but the world pays the bill for failure is no longer on," he said.
Because sound regulation is not a panacea it's important that banks have a solid equity base that will allow for human lapse and that can withstand the ravages of greed or the unexpected, he added.
He also called on G20 leaders to rise above nationalism and political aims, and readily dismissed arguments that global co-ordination on issues such as bank regulation infringe on sovereignty. Disagreements between Britain, Germany and France about banking rules and fractures within the U.S. Congress are taking place as if the rest of the world didn't exist.
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