Trichet Sides With Advocates of Crackdown on Banks

Trichet Sides With Advocates of Crackdown on Banks
By JACK EWING and JULIA WERDIGIER
Copyright by The New York Times
Published: March 12, 2010
http://www.nytimes.com/2010/03/13/business/global/13trichet.html?ref=global-home


With political momentum building in Europe to crack down on what many see as risky financial practices, the European Central Bank president, Jean-Claude Trichet, threw his weight behind the movement Friday by forcefully criticizing the banking industry.

Separately, the leaders of France and Britain, meeting in London, said they were close to forging an agreement on regulating hedge funds.

“At some point in our recent past, finance lost contact with its raison d’être,” Mr. Trichet said, according to the text of remarks delivered at a gathering of economists, policy makers and bankers at Stanford University in California.

“It ceased to be a source of services for the real economy and developed a life of its own,” Mr. Trichet added. “Finance became self-referential.”

To prevent future crises, he said, “we absolutely require intelligent regulation that will prevent self-destruction.”

Mr. Trichet’s comments came as the French president, Nicolas Sarkozy, and Prime Minister Gordon Brown of Britain said they were near a compromise on regulating hedge funds, whose trading practices have been blamed for exaggerating the Greek debt crisis. Private equity firms would also face new regulation.

Investment funds “located in offshore financial centers bear a great responsibility for the financial crisis,” Mr. Sarkozy said at a news conference with the British prime minister in London.

European Union finance ministers are scheduled to meet Tuesday in Brussels to vote on proposed hedge fund regulations. Britain, home to most European hedge funds, had opposed the regulations, but Mr. Sarkozy indicated a compromise was in the works that would take into account the importance of the financial services industry to London.

“It’s a balance we’re trying to strike and we have ministers working on it now,” Mr. Sarkozy said.

Mr. Brown said he and Mr. Sarkozy agreed that any regulations should include a levy on financial transactions. “I believe we can reach a solution over the next few days,” Mr. Brown said. “People will see that we have not harmed, indeed we have protected, the interest of the financial sector.”

One question, however, is how effective any rules would be if they applied only to Europe. Timothy F. Geithner, the Treasury secretary, complained about the proposed hedge fund rules Thursday to the European Union’s financial markets chief, Michel Barnier.

Mr. Trichet made his remarks at a gathering organized by the Stanford Institute for Economic Policy Research, which included several other prominent figures, including Lawrence H. Summers, director of the National Economic Council and a top adviser to President Obama; and Jamie Dimon, the chief executive of JPMorgan Chase.

Mr. Trichet has spoken in favor of more financial regulation in the past, but his remarks Friday seemed to take a harsher tone. And his comments may carry more weight because, as a cautious central banker who does not need to worry about re-election, he is less susceptible to charges of political populism.

Like the British and French leaders, Mr. Trichet seemed to take aim at hedge funds when he said: “Financial reform needs to go beyond the banking sector on which so much attention has been focused. We also have to look very closely at nonbank financial institutions and at the setup and functioning of financial markets.” Beyond suggesting that banks should be required to hold more capital in reserve, Mr. Trichet did not say specifically what changes were needed to prevent future financial crises.

But he mentioned credit-default swaps and other “complex financial instruments” that political leaders, including the German chancellor, Angela Merkel, have blamed for inflaming Greece’s already perilous finances.

The Greek prime minister, George A. Papandreou, also complained during a visit this week to Washington that speculators had driven up the interest rate the government must pay on its bonds.

Mr. Trichet has often lectured Greece on the need for better fiscal discipline, but he seemed to agree with Mr. Papandreou that derivatives could destabilize financial markets. “These were invented as instruments to repackage, disseminate and hedge risks,” Mr. Trichet said. “In fact, credit derivatives turned into potent vehicles for pure financial market participants to leverage their views.”

Mr. Trichet seemed to issue a warning to banks that have taken advantage of the huge amounts of cash that the European Central Bank has lent them at low rates. In some cases, banks have reinvested money borrowed at 1 percent in higher-yielding assets, earning millions of euros in easy profits.

“Banks might become dependent on today’s very favorable access to central bank refinancing to such an extent that their incentives to repair their balance sheets remain weak,” he said. The nearly unlimited money supplied by the central bank “opens the door to opportunistic bidding behavior.”