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Fed’s Kohn: Regulators Can Only Soften Future Market Events

Apr 12, 2008 Market Outlook

WASHINGTON (Dow Jones)–International banking regulators acknowledged Saturday
that they can only lessen the effects of future crises in the financial markets,
not prevent them.

“I don’t think we can prevent the kinds of waves of optimism and pessimism that
pass over the market particularly when there have been innovations,” U.S. Federal
Reserve Vice Chairman Donald Kohn said. “There will be future events - I think
our role … as regulators is to try and make the system more resilient.”

Kohn’s comments come amid the sharpest financial crisis in decades, as the U.S.
mortgage crisis continues to roil global markets and have an impact on growth
throughout developed nations.

Kohn is a member of the Financial Stability Forum, a group of senior officials
who Friday issued a closely watched report on lessons to learn from the recent
crisis. In its statement Friday, the Group of Seven leading industrialized
nations “strongly endorsed” the report and committed to implementing its
proposals as quickly as possible.

However, Timothy Geithner, president of the Federal Reserve Bank of New York,
seemed to play down calls by the U.K. and others for the FSF to join with the
International Monetary Fund to create an “early warning” system to spot brewing
economic and financial crises.

“The architects of the Financial Stability Forum initially debated the extent to
which it was possible to create an early warning system for financial crises,”
Geithner said. He said the group “made the judgment … that those were not
realistic objectives for a forum like this.”

Still, members of the group said they need to improve their efforts and address
the regulatory and market shortfalls that caused the current global financial
crisis.

“What we can do though - and we have to do a better job of doing it - is trying
to figure out how to make the system more resilient to a set of shocks we will
probably never have the capacity to fully anticipate,” Geithner said.

At the fore of the FSF efforts is a wide-ranging report issued by the group
Friday to better steel the global financial markets against future turmoil.

The report includes a series of recommendations for major financial firms,
central banks, regulatory bodies and other groups to improve transparency in the
financial system and address lax risk-management practices that contributed to
the current problems.

Bank of Italy Governor Mario Draghi, who leads the FSF, described the paper as
the “first step in this regulatory response.” He said many of the recommendations
included by the group were actually definitive “policy decisions,” and that the
FSF plans to report as early as June to the G7 on progress in implementing the
reforms.

Whether private firms will embrace the many recommendations, some of which will
result in higher business costs, remains to be seen. Nout Wellink, like Draghi a
member of the European Central Bank’s Governing Council, said the approach by the
private sector “on balance has been productive.”

“They realize how difficult the circumstances are. They were part of this
process,” Wellink said.

G7 officials sat down Friday night with executives from leading global financial
institutions to discuss the latest developments in the crisis.

Meanwhile, FSF members said it was too early to predict the timing or final
extent of the current market downturn.

“The market is still adjusting … there’s still a very fragile situation out
there,” the Fed’s Kohn said Saturday. “An awful lot of these estimates of what
the eventual losses will be depend on what happens to the U.S. housing market and
to the effects on other economies of the financial market tightening.”

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Technorati Tags: Bank Of New York, Developed Nations, Donald Kohn, Dow Jones, Dow Jones International, Early Warning System, Federal Reserve Bank, Federal Reserve Bank Of New York, Financial Crises, Financial Stability Forum, Future Market, Global Financial Crisis, Global Markets, International Banking, International Monetary Fund, Optimism And Pessimism, Realistic Objectives, Senior Officials, Shortfalls, Timothy Geithner

Tags: Bank Of New York, Developed Nations, Donald Kohn, Dow Jones, Dow Jones International, Early Warning System, Federal Reserve Bank, Federal Reserve Bank Of New York, Financial Crises, Financial Stability Forum, Future Market, Global Financial Crisis, Global Markets, International Banking, International Monetary Fund, Optimism And Pessimism, Realistic Objectives, Senior Officials, Shortfalls, Timothy Geithner