By Gillian Tett in London and Krishna Guha in Washington
Published: April 30 2008 03:00 | Last updated: April 30 2008 03:00
Banks, hedge funds and other financial institutions could find their investment strategies curtailed by the Federal Reserve to reduce the risk to the economy from asset bubbles, the US Treasury said yesterday.
David Nason, the assistant secretary for financial institutions, said the US central bank should use its proposed new powers as a stability regulator to "lean against the wind" by forcing institutions to change their investment strategy if it judged they threatened the wider economy. The powers were outlined in a Treasury blueprint published last month, which would need congressional approval and may not even reach the statute book. But regulators see them as offering a template for future regulation of the financial system. A key feature of this plan is to give the Fed roving authority to collect, analyse and publish market data from a wide range of financial institutions, from banks to hedge funds.
Mr Nason said the Fed would have broad "macro-prudential" authority that it could use to try to "prevent broad economic dislocations caused by potential excesses". As the "market stability regulator" the Fed would also be able to force financial institutions of all kinds to change their strategies if their actions created risks to financial stability, Mr Nason said.
"The market stability regulator must have access to detailed information about all types of financial institutions," he said in London. "[It] should have the ability to require financial firms to undertake corrective actions to address financial stability problems." His comments came as new data showed US house price declines accelerated in February, while consumer confidence slumped further in April.
The Federal Reserve is expected to cut interest rates by another 25 basis points to 2 per cent today, while hinting that it could pause at the next meeting in June.
Mr Nason said the collection and publication of data on market risks would help prevent market excesses from spiralling out of control. "Such actions, combined with enforcement authority as necessary, would provide a clear signal," he said. "We would expect that this action alone could have an impact on overall behaviour."
The proposal is likely to be viewed with deep unease by hedge funds which generally are not required to submit extensive data on activities to the authorities. And some policy makers warned that it could be difficult to implement these new powers, without forcing more financial activity offshore.
However, the US plan will be closely watched by regulators, particularly in Europe, where many central bankers are eager to acquire the kind of "macro-prudential" powers the US Treasury would like to give to the Fed.
In recent months officials at the European Central Bank have become increasingly alarmed by their lack of market data. A similar debate about the functions of the central bank in relation to market stability is also underway in the UK, as a result of a government review of the Northern Rock collapse.
Separately, Mr Nason also admitted that the decision to extend aid to Bear Stearns could require greater regulation on investment banks, if they retained access to Fed financing facilities. "For years public policymakers have struggled with the notion that certain institutions could be deemed "too big to fail. Now we should consider whether certain firms are too 'interconnected to fail'," he said.
You can call it.... "Fascism in its early stages"
Edited by Insider, 04 May 2008 - 04:21 AM.
. Further concentration of regulatory power is making it worse faster.
