U.S. Institutions Split on Systemic Risk Regulator

August 5, 2009 (PLANSPONSOR.com) - 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 United States, Europe, and Asia, according to a new Greenwich Market Pulse.

However, on proposals that would empower a government entity to regulate systemic risk, companies and institutions in the U.S. are split. A Greenwich press release said almost 40% of U.S. respondents are in favor, the same proportion opposed, and the remainder neutral.

Support for a systemic risk regulator was highest in the U.K. (70%) and Asia (68%).   Overall, almost half of participants support proposals that would empower a government entity to regulate systemic risk, with 28% opposed, and almost a quarter neutral, according to the press release.

In the U.S., 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 function. 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.

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, in the press release.

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.

The study reveals 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 favor of efforts to increase regulatory supervision and control over hedge funds (see Obama Administration Takes up Hedge Fund Regulation ).

Nearly 65% of respondents favor the shift from OTC to exchange-based trading, including 70% of U.S. companies and financial institutions, according to a Greenwich press release. Support is even stronger for proposals that would centralize the clearing of OTC derivatives trades, with almost 70% of respondents saying they would be in favor of this step (see House Reps Release Guidance for Derivatives Legislation ). Worldwide, support for this proposal ranges from almost 60% among corporations, to 65% among banks and more than 80% among other financial institutions.

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 (see House Approves Exec Comp Reform ).

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 favor of such proposals, with more than a quarter saying they would "strongly support" these measures.

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.

Greenwich Associates surveyed 458 large corporations and financial institutions in North America, Europe and Asia.