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Too Big to Get Wrong: Getting Financial Regulatory Reform Right

Speaker: Robert E. Diamond Jr., President, Barclays PLC
Presider: Maria Bartiromo, Anchor, CNBC
December 14, 2009

This session was part of the Corporate Program's CEO Speaker series.

Barclays PLC President Robert Diamond spoke at the New York office of the Council on Foreign Relations on December 14, highlighting what he considers the most important aspects of financial regulatory reform to ensure a sustained economic recovery and avoid another crisis. Diamond discussed wayward negative public sentiment about trading, noting that 98 percent of losses in the financial system have originated with loans, not trading. He also stressed the need for strong banks to play a vital role in transferring risk from those that seek to get rid of their risk and those that need access to risk, such as pension funds. On the responsiveness of financial institutions to the financial crisis, he said most of the big banks are not waiting for U.S. financial regulation and have already improved their capital reserves, lowered leverage, increased cash for liquidity, and openly supported the compensation guidelines of the Financial Standards Board.

Diamond noted the importance of derivatives to developing countries such as Mexico that have used the instruments to hedge their forward oil production, maintain their credit rating and budget, and keep their schools open. "The rhetoric around casino banking has to end," he said. "If we go too far down the [road of] safe and sound, we run the risk of hurting the ultimate clients--our corporates and our governments and our pension funds--and stifling economic growth."

On regulating "too big to fail" institutions, Diamond stressed that "big and systemic are not synonymous." Many small banks, notably Britain's Northern Rock, have failed because of relying on a single product, he said, whereas big banks often have better management and allow banking clients to transfer risk across borders, especially in emerging markets. When asked about the impact of the financial crisis on sovereign debt, Diamond noted that private investment has grown to ten times that of development aid in emerging markets, posing a serious threat to growth in those regions if cross-border banking institutions and capital markets are too severely reined in or broken up. "Without global banks and capital markets, we'll have a real decline in the standard of living in the developing world," said Diamond.

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