EU backs new banking rules

European Union (EU) leaders will agree more steps on Friday to avert a repeat of the banking crisis that has sapped the world economy and the International Monetary Fund (IMF) said 2010 might deliver stronger growth than earlier forecast.

The EU summit in Brussels will back the creation of a cross-border system of bank supervisors, a draft text showed, after talks on Thursday alleviated British fears that the new pan-EU bodies could undermine the power of its national regulators to guide its financial service sector.

The crisis that struck nearly two years ago when a long-running global credit boom went bust is destroying jobs in economies around the world and the IMF steered clear on Friday of suggesting signs of slowing economic decline amounted to a recovery.

“After two quarters of an unprecedented global economic contraction that carried through this year’s first quarter, signs are emerging that the rate of output decline has moderated,” IMF first deputy managing director John Lipsky told a Turkish business conference.

Given this backdrop, “I expect that in the coming weeks we will revise our growth projections modestly upward, mainly with regard to 2010,” Lipsky added.

A source from the Group of Eight leading economies told Reuters on June 11 that the IMF had raised its global growth estimates for 2010 to 2,4% from 1,9% in April because of stimulus measures taken in recent months.

There were more signs on Thursday and Friday that the trillions of dollars governments around the world have poured into economic stimulus had provided a safety net of sorts.

United States jobs data on Thursday showed the first drop since January in the number of unemployed people staying on benefit rolls and manufacturers in the US Mid-Atlantic region reported business shrinking less sharply than expected.

That helped to reassure world stock markets, which had begun to stall earlier this week as doubts set in about the degree and pace of economic recovery that had been priced into a strong rally since March.

On Friday, the MSCI world stocks index edged higher, following a late turnaround in Asian equities.

Thai data on Friday showed exports fell by a record 26,6% in May but the fall in shipments to China—widely viewed a driver of any world economic recovery—was the smallest since January.

“US economic data is pointing to an end to the US recession. Good news? Absolutely,” said Patrick Bennett, Asia FX and interest rate strategist at Societe Generale in Hong Kong.

“But unfortunately the end of recession does not mean the end of pain.”

Uncertainty on recovery
The IMF is scheduled to present updated forecasts for the world economy on July 7 in Washington. Its previous forecast in April was for the world economy to contract 1,3% this year in the deepest post-World War II recession.

“There is still great uncertainty regarding the timing and pace of economic recovery,” Lipsky said on Friday.

Italy reported that its jobless rate rose in the first quarter to its highest level for three years and employment fell for the first time since 1995 as the recession continued to take a heavy toll on the labour market.

A widespread view the crisis was rooted in excessive risk-taking on Wall Street and in other financial centres has provoked debate about how to expand and coordinate the power of financial regulators around the world.

The EU’s financial supervisory proposals involve creating three pan-European regulatory bodies next year to ensure countries introduce new rules on supervision, and a new European Systemic Risk Board that would monitor risks to stability.

The agreement followed US President Barack Obama’s announcement on Wednesday of what he called the most sweeping reform of US financial supervision since the 1930s.

Reacting to British concerns, the summit draft stated explicitly that any decisions taken by the new bodies “should not impinge in any way on the fiscal responsibilities of member states”—for example, by forcing a costly bank bail-out.

The head of Britain’s financial regulator said on Friday he was broadly in favour of the proposals and also said banks viewed as too big to fail may need to meet higher standards in shoring up their capital than smaller rivals.

The comments by Adair Turner, chairperson of the Financial Services Authority, echo concerns about big banks raised earlier this week by Bank of England Governor Mervyn King and by the Swiss National Bank, which proposed tough new rules on Thursday.—Reuters

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