A new agenda for change So while the architecture may remain fundamentally the same, the plumbing of the financial system has undoubtedly been improved. This is unromantic work, but when crisis hits in the middle of the night, and unpleasant odours emerge from the system, it is the plumber you call, not the architect. However, it is reasonable to ask whether these changes are sufficient to reduce the incidence of financial crises in the future and to enhance our ability to manage such crises as will, inevitably, occur. I do not propose today to try to cover all the issues that might be raised by that general question. I certainly do not plan to talk about fiscal and monetary policies, which are no longer my area of expertise. I will also leave to one side the important developments of bankruptcy and insolvency procedures. The IMF’s Sovereign Debt Restructuring Mechanism (SDRM) proposal seems to have been shelved for the time being but, judging from recent successful bond issues by Mexico and Brazil, some solid progress is clearly being made on collective action clauses which should allow for more timely and orderly restructuring of sovereign debt in case of problems. However, all of these subjects are, as we say, above my pay grade. I will concentrate instead on the regulatory dimension. I do not propose a very radical agenda. Regulators are not normally revolutionaries.
So far the international regulatory community has not been successful in getting a grip on the extent of the possible systemic problem. It is a gap which needs to be filled quickly. Similarly, I am not sure we know enough about the hedge fund market. I chaired a working group on highly-leveraged institutions for the Financial Stability Forum, which reported a couple of years ago. Our conclusion then was that there needed to be better risk management by hedge fund counterparties, better risk management by highly-leveraged institutions themselves, enhanced public disclosure by those institutions, and some other related changes. I am not one of those who believes that hedge funds are inherently dangerous beasts in the financial jungle. Indeed in many cases hedge funds have been useful in being prepared to take positions, sometimes counter-cyclical positions, which have helped stabilise markets. But the sector has grown dramatically, and as the Long-Term Capital Management problem showed, if leverage is uncontrolled, even one fund alone can be a destabilising factor. So while I do not believe that the case for direct regulation of hedge funds is made out, I do think we need more transparency, particularly about the extent of their leverage, and the recommendations to that effect in my earlier report have not been effectively implemented as yet. It is encouraging that under its new Chairman the SEC are holding a series of roundtables on the subject in New York.