Companies and financial institutions around the world express strong levels of support for many of the key components of financial regulation reform proposed by governments in the US and Europe, according to a new Greenwich Market Pulse.
Greenwich Associates surveyed 458 large corporations 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 – in some cases surprisingly strong – support for regulatory proposals ranging 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,” said Greenwich Associates consultant John Colon. “However, the results from this Greenwich Market Pulse reveal that while these important private sector entities recognise the need for reform, the details of the new regulations will determine their ultimate reactions. 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 politicised.”
Systemic Risk Regulator
Almost half of participants support proposals that would empower a government entity to regulate systemic risk, with nearly 30% opposed and almost a quarter neutral. Support for a systemic regulator is highest in the UK (70%) and Asia (68%). Companies and financial institutions in the US are evenly divided on the issue, with almost 40% in favour, the same proportion opposed and the remainder neutral. Overall, 28% of respondents say they would not support the establishment of a systemic regulator.
Almost 65% of European respondents believe that the proposed European Systemic Risk Council, or any other systemic risk regulator, should be granted the power to implement policies directly, while slightly more than 35% believe that a new systemic regulator should act in a strictly advisory capacity. In the US, half the respondents indicated that 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 important function.
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.”
Hedge Fund Regulation
The survey results reveal broad support for stricter hedge fund regulation. Overall, more than 60% of large companies and 58% of financial institutions participating in the survey are in favour of efforts to increase regulatory supervision and control over hedge funds.
Nearly 65% of respondents favour the shift from over-the-counter (OTC) to exchange-based trading, including 70% of US companies and financial institutions. Support is even stronger for proposals that would centralise the clearing of OTC derivatives trades, with almost 70% of respondents saying they would be in favour of this step. Worldwide, support for this proposal ranges from almost 60% among corporations, to 65% among banks and more than 80% among other financial institutions.
Shareholder Say on Compensation
Large companies and financial institutions are divided on the question of whether shareholders should be granted greater influence on executive compensation. Forty-three percent of respondents say they support so-called ‘shareholder say’ proposals, 34% oppose and 23% say they are neutral on the issue.
Bank Loss Provisions
Proposals to revise rules for loan loss provisions to allow banks greater leeway to build reserves during strong economic periods receive strong support from companies and financial institutions around the world. Two-thirds of survey respondents are in favour of such proposals, with more than a quarter saying they would ‘strongly support’ these measures.
New Securitisation Rules
The survey results reveal broad support for a proposal that would prevent originators from selling off entire amounts of asset-backed or mortgage backed securities by requiring them to hold a minimum proportion of new issues. Almost 65% of large companies and financials around the world support such measures, with only 18% opposed.
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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