October 7, 2008 4:10 am

Volcker urges overhaul of banking regulation

National and international banking regulation needs urgent reform in the face of the shortcomings exposed by the financial turmoil, Paul Volcker, former chairman of the US Federal Reserve, said on Monday.

“We have seen how regulatory approaches and methodologies that may have worked well under benign financial conditions can break down during a major market disruption,” he said. “It is evident that a number of countries need to revise and reform financial regulatory structures.”

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The global financial crisis presented “not a uniquely American question but a worldwide question”, said Mr Volcker, who served as Fed chairman between 1979 and 1987.

“There are large questions within Europe about regulation and supervision within the European Union,” he said.

The strain of the financial crisis was already shifting the regulatory landscape dramatically, he said, adding that commercial banks could re-emerge as the central figures in the US credit markets following the demise of many investment banks.

“The system is reorganising itself, under great pressure,” he said.

His comments came as the Group of Thirty, composed of an international group of experts, released a report on the global structure of financial supervision and as governments and central banks around the world continued to take dramatic actions to combat market turmoil.

Mr Volcker, who is the chairman of the G30’s board of trustees, said the spread of the US credit crisis to other economies underscored the need for greater global co-operation. The US Treasury taking on the role of lender of last resort, he said, was “appropriate in this particular crisis” when the value of assets was at risk and taxpayers’ money was on the line .

However, he said the Treasury was acting “on the fly” without “consistency or longevity”. Meanwhile, the Fed had “exercised authority which goes well beyond
anything I thought was normal for the central bank”.

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