24 September 2009

London – A year on from the collapse of Lehman Brothers, there has been little in the way of practical progress towards the kind of bank regulation that is desperately needed – particularly given the accusations of a return to ‘business as usual’ in the industry. Thus, it is hoped that the G20 summit will not be hamstrung by attempts to make the high-visibility, low-impact issue of bank bonuses a priority.

 The forthcoming G20 meeting will be the third since the financial crisis officially took hold, so the need for world leaders to push for the regulatory changes that they have been touting for 12 months now is stronger than ever. Against a background of returning profitability in the banking sector, there is a real danger that the momentum behind introducing tighter regulation will be lost unless changes can be at least agreed upon in the short term.

 Kieran Hines, cards and payments analyst with Datamonitor, explains: “It is in this context that the public face of the meeting has become fixated on bank bonuses, with reports of a French plan to cap individual bonuses just one in a long line of similarly tokenistic examples of populist politics being played with an issue of vital importance.”

 It is therefore hoped that the public and private aspects of the latest G20 session will be very different. The publications of the Financial Stability Board (FSB) – created through the expansion (and, frankly, unimaginative) re-branding of the Financial Stability Forum – suggest that its recommendations to the G20 will focus on the more critical steps needed to reduce the damaging pro-cyclicality in the banking sector. Most notably, it highlights improving the quantity and quality of capital held across the credit cycle, tightening accounting standards, and strengthening the robustness of the OTC (over the counter) derivatives market as core areas for new regulation to address.

 Hines adds: “The more media-friendly issue of improving compensation practices is also highlighted as an important issue to be tackled. However, the FSB is equally clear that short-term incentives were not the single cause of the crisis, and that solving this issue will not be the key to long-term stability in the banking sector.” For this process to be a genuine success then, the G20 world leaders will need to set aside their political concerns for the greater good.

 Ultimately, the biggest lesson to be learned from the crisis is that a global financial services industry requires regulation at a regional or international level if that supervision is to be truly effective. Kieran Hines concludes: “For better or for worse then, it will be the G20 summit and the strategies that the leaders put in place which determine whether this crisis becomes a fragment of history or a recurring nightmare.

- Ends -