Deutsche Bank AG Chief Executive Officer Josef Ackermann said unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn’t increased.
“You have an unregulated area which becomes — as a consequence of all the regulatory changes — more and more important,” Ackermann, 62, said in an interview at the World Economic Forum in Davos, Switzerland. “You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector.”
Ackermann’s warning echoes comments made by former U.S. Treasury Secretary Lawrence Summers, who said this week in Davos that regulators haven’t paid enough attention to problems that could emerge in “a large, less healthy buccaneer sector.” Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression.
“If you separate utility banks from casino banking, you will one day realize that casino banks are also counterparties to corporations but also to other banks and to asset management and to governments,” Ackermann said yesterday. “It would be somewhat naïve to assume that if you have a strong regulated sector and leave the unregulated in the open, that you will never have systemic risk.”
The biggest U.S. banks such as Bank of America Corp. and Goldman Sachs Group Inc., also facing tighter scrutiny and higher capital requirements, argue they’ll be at a competitive disadvantage if hedge funds, money managers and insurers aren’t subject to similar constraints.
Representatives for the latter have fought back in meetings with government officials, saying economic stability wouldn’t be threatened if one of their firms failed. The Alternative Investment Management Association, a London-based group that represents hedge funds, released a statement today that says it’s “inaccurate” to call the industry unregulated.
“All the major jurisdictions where hedge funds operate, whether in North America, Europe or Asia-Pacific, have rigorous regulation of the industry,” the group’s CEO, Andrew Baker, said in the statement. “This already rigorous regulation is being increased by new legislation introduced since the crisis.”
The U.S. Congress in July approved the Dodd-Frank Act, which forces hedge funds to undergo routine inspections by the Securities and Exchange Commission and requires firms that manage more than $1 billion to disclose their investments, leverage and risk profile to regulators.
European lawmakers in November approved regulations requiring hedge funds to set limits on their use of leverage and avoid pay practices that encourage risk taking.
Deutsche Bank, which is scheduled to publish fourth-quarter and full-year earnings on Feb. 3, will likely pay bonuses that are in line with other competitors in the market, Ackermann said.
When asked about considerations by Credit Suisse Group AG to pay parts of bonuses with bonds that convert into equity if the company’s capital shrinks, he said the German firm sees “too many challenges” with the so-called CoCos and is not yet planning to use them for pay.
“I think we are paying the bonus which markets require,” he said. He declined to comment on whether variable pay for 2010 will be lower or higher than the year before, saying only that compensation at Frankfurt-based Deutsche Bank, Germany’s biggest bank, complies with “all the directives and recommendations” from policymakers and regulators.
Ackermann said in December 2009 that the big German financial institutions, including Allianz SE and Commerzbank AG, agreed to impose self-discipline on pay based on recommendations by the Basel, Switzerland-based Financial Stability Board.
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