Regulatory issues at core of crisis

Regulatory imbalance is at the core of the current global financial crisis, according to a senior official with the Organisation for Economic Cooperation and Development (OECD).

Adrian Blundell-Wignall, deputy director, financial enterprise affairs, with the OECD told the Australian Securities and Investments Commission (ASIC) summer school that four primary events in 2004 led to the financial crisis, although he acknowledged a number of other facilitating contributors.

The four issues Blundell-Wignall identified were the ‘American Dream’ mortgage policy signed into law in the US, the publication of the Basell II accord, which prompted change in banks looking towards 2008 when the regulations would come into effect, the US Securities Exchange Commission's (SEC's) regulatory changes for investment banks and the imposition of PFHEO Fannie Mae and Freddie Mac controls.

In particular, his focus was on regulatory issues, arguing, for example, that SEC rule changes in the US meant the leverage ratio in regulated banks overseas accelerated sharply after 2004.

Blundell-Wignall, who led a panel discussion on the causal factors for the current meltdown, crisis management and exit, acknowledged the role of the sub-prime crisis in the US, and also identified problems between principals (including taxpayers and shareholders) and agents (including the central banks and regulators). He said there was a macro issue of poor global financial architecture and, from a micro perspective, he pointed to the mixing of credit and equity culture.

Blundell-Wignall also discussed the issue of “toxic assets”, which he said “started to explode” after 2004.

“Toxic residential backed securities were parabolic after 2004,” he told the conference, adding that factors such as agency, business loans, common mortgages and consumer credit among other elements were facilitating, not causal.

Blundell-Wignall was critical of the Basell II accord, but did not elaborate on this during the session.

On an exit strategy, Blundell-Wignall highlighted the importance of crisis management and also said it was crucial to prevent increased damage to the market.

“Unfortunately new damage is being done and there’s a lot of it,” he said. “The more crisis measures are sustainable the more credible the market will see the overall approach to solving the crisis,” he said.