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G20 reform agenda knocked sideways by Obama

Finance Blogger: Ian Fraser Ian Fraser

Despite the worthy talk at the recent World Economic Forum in Davos, the world is even further from reaching unanimity about how best to re-regulate banks and financial institutions than at the G20 summit in Pittsburgh last September.

At the Pittsburgh event, world leaders agreed that the focus globally should be on strengthening bank capital rules. Then President Barack Obama went and threw a spanner in the works with his surprise call for deposit-taking institutions to be banned from getting involved with proprietary trading, hedge funds and private equity.

Against this backdrop, the world is dividing into three main camps where the regulation of finance is concerned.

First there is banker-led group led by Josef Ackermann, chief executive of Deutsche Bank. This group cannot really see what all the fuss is about and is resistant to substantive change, but accepts it might make sense to rein in bonuses for a year or two.

Secondly there are the G20 believers, led by politicians like Gordon Brown and regulators such as the FSA’s cerebral chairman Lord Turner. Their preference is to focus on the strengthening of banks’ capital ratios and doing things like rehashing accountancy rules.

Finally there’s the ‘angry’ brigade, who are enraged by the lack of humility displayed by bankers. This group now has Obama as its cheerleader. Whether for reasons of populism or for reasons of economic sustainability, the group favours more draconian interventions, including cutting “too big to fail” banks down to size and forcing them to split “casino” activities from “utility” banking.

It’s difficult to see how a consensus can emerge from these warring factions. The issue is exacerbated by the number of official bodies proposing a range of divergent solutions - even at the global level. As Sir Howard Davies, director of the London School of Economics, pointed out in a thoughtful blog post on his Davos experience:


"There’s a confusing plethora of groups engaged in trying to reform the global regulatory system - the G20, the Financial Stability Board, the Basel Committee and what have you. Now the people of Massachusetts seem to have decided to lend a hand. Perhaps the Canadians can make sense of all these competing initiatives at their G20 summit. In the meantime confusion reigns, which is not good for confidence."

There’s also the side issue of insurance, which to some is the “elephant in the room”, given so much of the focus has been on banks. In the US, the Federal Reserve is not even responsible for regulating insurance (it’s down to individual states) and this has created something of blind spot when it comes to deciding how to re-regulate the sector, as has congress’s predeliction for classifying credit default swaps as investments rather than insurance products.

To me, the starting point for change ought to be that many of the world’s largest banks are today even more dominant – and therefore potentially even more destabilizing – than they were in the run-up to the crisis in 2006-07. Many are using access to low-cost capital made available through low interest rates and quantitative easing to make big bets on currencies, commodities, stocks and bonds rather than focus on lending to the “real economy”.

In my view, this problem can only really be addressed if the “angry brigade” – who include the likes of Bank of England governor Mervyn King and presidential advisor Paul Volcker – emerge triumphant.

It will be interesting to see which, if any, of the three groups has gained the upper hand at the global level by the time of the G20 summit in Canada in June. The real danger, however, is none will have done, which is going to make it even more difficult than it was in Pittsburgh for the G20 reach any meaningful consensus on regulatory reforms – and that we see a return to the dangerous game of regulatory arbitrage, sometimes known as a "race to the bottom".

As Canadian prime minister Stephen Harper said in a speech at Davos: "The real test of the G20 going forward, is that it develops and sustains among its members a sense of shared responsibility towards the global economy."

Further reading


Tags: banking , Barack Obama , financial crisis , Financial Services Authority (FSA) , G20 , insurance , international differences , regulation , US
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