U.S. and G-7 Allies Disagree About Regulation Measures : Global Financial Reform: A Clash of Perceptions 
International Herald Tribune
January 30, 1999
Jonathan Gage and Alan Friedman 

The United States and its G-7 partners disagreed sharply Friday about overhauling international financial regulations, clouding prospects for any quick agreement on policing the capital flows at the heart of global financial crisis.

Speaking at a conference of business leaders here, officials from Japan, Germany, Britain and France appeared eager to press ahead quickly with measures that would toughen regulation, monitoring and oversight of international flows of money through vehicles

such as hedge funds. But American officials, while stressing the importance of more openness and surveillance, were wary of creating new regulatory structures.

Critics have suggested that the economic turmoil that spread over the last year and a half from Asia through Russia to Brazil and other emerging markets, setting off alarms in the world's financial capitals, was exacerbated by lax oversight and insufficient safeguards.

Gordon Brown, the British chancellor of the exchequer, said leaders should "quickly set up" what he called "a new global standing committee of international and national regulators to conduct the regular and systematic surveillance of our world financial system." He said this "early warning system on financial issues" should be put "in place before the summer."

By contrast, U.S. officials countered with proposals for a less interventionist approach that relied on sound government policies and greater prudence on the part of investors and lenders.

"I am skeptical about singling out one class of market participants" for regulation, Lawrence Summers, the U.S. deputy secretary of Treasury, said of proposals to rein in hedge funds. Rather, he said there should be "better risk management by the major investors."

Eisuke Sakakibara, Japan's deputy minister of finance, said it was "important to proceed speedily on the issue of a new international financial architecture."

In particular, the influential Mr. Sakakibara called for more monitoring of private capital flows, discussion of exchange-rate regimes among major world currencies and also the need to designate a lender of last resort.

Finance Minister Dominique Strauss-Kahn of France added his voice, calling for the Group of Seven finance ministers' meeting on Feb. 20 "to make the decisions we really need."

Mr. Strauss-Kahn, while stressing the need to keep markets open, nonetheless called for "a commitment by G-7 members to strengthen their cooperation by even more frequent meetings, and systematic coordination."

In response, Mr. Summers said, "Cooperation and coordination between the G-7 is obviously desirable, but I would record some skepticism about the view that more frequent or improved statements from ministers and governors" of central banks "would serve by themselves to stabilize markets."

Vice President Al Gore, in a separate address to the assembled participants of the World Economic Forum here, called for developing "the right kind of financial architecture to prevent and contain future crises."

Mr. Gore steered a middle course, calling for change "not through new global bureaucracies and not through the laissez-faire approach that has caused so many of today's problems — but through more information, more openness, more cross-border reviews and cooperation."

Mr. Gore called for "an international version of generally accepted accounting principles," the standards by which U.S. companies keep their books.

Several government officials here said they were still awaiting a report from Hans Tietmeyer, president of the German central bank, who was asked by the G-7 to survey international financial institutions and make proposals aimed at improving global regulation.

The search for an improved global regulatory system, described by finance ministers as a new financial "architecture," has been under way for nearly five years, and predates the Asian financial crisis of 1997, the Russian crisis of August 1998 and the more recent Brazilian crisis. Each year since 1994, the G-7 has announced plans to create a better system of checks and balances.

Last year an informal working group of G-7 officials, together with ministers from 15 developing countries, produced a set of studies aimed at improving transparency and surveillance of the world financial system.

Jose Angel Gurria, Mexico's finance minister and a member of the working group, warned, however, of seeking an elaborate new regulatory structure. "We should not lose track of the fact that every time countries have financial problems people say the global system is not working," Mr. Gurria said in an interview here Friday.

Siding with the U.S. position, Mr. Gurria said, "We need transparency and a strong focus on a regulatory system for international banks, but if each nation does its homework we may not need dramatic new structure."

Prime Minister Mahathir bin Mohamad of Malaysia rejected the U.S. notion that strong regulatory measures were not needed to restore stability to financial markets and protect emerging economies. "Let's have transparency of hedge funds in countries where they operate," Mr. Mahathir said, advising them: "You say we should be transparent, now let's see you become transparent."

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