Geithner calls for tougher global regulation of giant financial companies

By Stephen Foley in New York

New regulation to tame and protect the financial system should be co-ordinated on a global basis, the US Treasury Secretary said yesterday.

Tim Geithner declared that the lesson of the AIG débâcle was that the US needed much tougher oversight of giant financial firms and ways to identify problems that put the financial system at risk, but that national efforts would be undermined unless other countries also tighten the rules.

His comments, at a Congressional hearing into last year's collapse of the insurance company AIG, suggests that international regulatory reform could be a significant area of progress at the G20 summit in London on 2 April.

Analysts say the US position on regulation has shifted closer to the long-standing demands of continental European powers.

AIG had made trillions of dollars of bets on mortgage derivatives and other credit instruments, which turned sour, forcing the US government to take an 80 per cent stake and to pump in more than $170bn of public funding to help it meet its liabilities.

Mr Geithner and Ben Bernanke, the chairman of the Federal Reserve, each yesterday pushed US lawmakers to tighten controls on financial firms, establish a process for seizing control and winding down giant financial firms that get into trouble, and give regulators the power to monitor "systemic risk". Other financial centres, including London, should also step up oversight and regulation, so that systemically important firms cannot escape scrutiny by simply headquartering overseas, Mr Geithner argued. "The best defence for us is not to wait for the world to put in a stronger system, but also to encourage them to move with us to put in place higher standards," he said.

Mr Geithner was among the G20 finance ministers who met in London earlier this month to prepare the ground for the heads of state meeting. The ministers pledged to encourage greater regulatory co-operation and to make sure hedge funds and other important non-banking institutions are brought under the same strictures as banks.

Sebastian Mallaby, the director of the Centre for Geoeconomic Studies at the Council on Foreign Relations in Washington, said that regulation of this "shadow banking system" could be one of the key achievement of the forthcoming summit. "They appear to be bridging the old gap between the US and UK on the one hand, and continental Europe on the other, because they all now agree on the need to regulate and therefore to follow the European desire to do something about the shadow banking system," he said. "They may still disagree on the details, but I suspect they will be able to trumpet achieving a high-level agreement."