Central banks agree to monitor hedge funds
Yozo Matsuda Yomiuri Shimbun Correspondent
LONDON -- Major industrialized nations have agreed to monitor and regulate commercial bank financing to global hedge funds in a bid to control speculative trading, it was learned Wednesday.
The Basel Committee on Banking Supervision--which comprises the central banks of Japan, the United States and industrialized European nations--is expected to release a report on the agreement in the near future, giving the green light for governments to strengthen their control over such financing by the end of the year.
The committee is based at the Bank for International Settlements (BIS).
The report will also be presented to a meeting of finance ministers and central bank governors from the Group of Seven industrialized nations scheduled for next month.
Since the key objective of the agreement is to force international banks to strengthen their capital-adequacy ratios, which will ease the effects of bad debt losses as the result of financing to high-risk hedge funds, financial institutions with weaker-than-required capital bases are expected to become hesitant to extend such loans.
The parties to the agreement are believed to have decided to indirectly monitor bank loans as it is otherwise technically difficult to regulate lending to hedge funds, which are often based in laissez-faire tax havens.
Hedge funds are global, speculative investment pools for wealthy, international investors.
Malaysian Prime Minister Mahathir Mohamad is a vocal opponent of the funds, and has blamed them for Asia's financial crises.
More than 300 billion dollars is currently believed to be under the management of more than 3,000 hedge funds worldwide.
Industrialized nations had been studying ways to control hedge funds on the assumption that curbs on their movements, in which money far above the amount actually owned or available is invested in derivatives, would help stabilize international financial markets.
The regulations drawn up by the Basel committee are aimed at preventing hedge funds from affecting the fortunes of financial institutions and the market as a whole.
Under the agreement, banks will be required to file regular reports to financial authorities detailing the value of outstanding loans to hedge funds. The banks' capital-adequacy ratio, a means to gauge the financial standing of their operations, will also be reviewed to curb excessive lending to the funds.
The BIS currently requires international banks to maintain a capital-adequacy ratio above 8 percent. However, under the agreement, banks will be required to boost their capital bases when extending loans to risky hedge funds.
Since extensive financing to hedge funds would lower banks' capital bases and seriously affect their standing in the market because their credit ratings would suffer, those with low capital bases are expected to slash such lending.
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