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Lehmans One Year on - International Centre for Financial Regulation

It is almost a year since it appeared we were at the brink of financial Armageddon. It is a useful time to take stock of where we are, what we have learned and what remains to be done.

To the credit of regulators and policymakers the propitious action taken was accommodative; rates lowered, abundant liquidity made available, and fiscal stimulus applied liberally. Regulators took their time to consider the appropriate regulatory responses, recognizing that knee-jerk reactions on capital, leverage, liquidity and pay and bonuses could have the devastating short-term outcome of deepening the financial and economic crisis, and significant long-term unintended consequences. Regulators and policymakers discussed these issues across borders and recognized the need for concerted action.

The G20 and its members pronounced on a long list of issues from offshore centres and executive pay and governance, to regulatory reform. Rafts of policy papers and proposals, at the domestic and international level, have been drafted and put out for comment.

Incrementally, markets have regained some semblance of confidence. Signals of economic revival and house prices bottoming out have occurred sporadically. Liquidity has returned to some key markets. Asset prices are improving. Accommodative monetary policy has permitted banks to rebuild interest and trading income without looking like they have received a further direct government subsidy.

The sector’s problems are not yet behind us. Loan losses, which lag other indicators, will continue to build and cost banks in provisions for some foreseeable time to come. Nonetheless, some in the financial sector are choosing to think the worst is behind them. They hope that systemic change is not longer necessary because they have begun to make money again in such a low interest rate environment.

Legislators are working to implement G20 proposals either domestically or regionally with mixed results. It is remarkable how much easier it was to act in a concerted fashion when the world was in genuine crisis mode. Now that we appear to have stepped back from the brink, political unity has gone by the wayside. Political expediency, partisanship, and the settling of old scores have come to the fore. This is a shame.

It appears that banks have also returned to ‘business as usual.’ Big bonus payments and hefty pay packages for star teams are back in the news and those banks that can afford to are hiring talent again. Governance reforms are mooted, but most teams are still compensated on revenues, not risk-adjusted returns. Most departments within banks continue to see each other as competitors, instead of having a unified sense of identity, teamwork and strategy for their institutions. Shareholder activism on governance issues has not actually increased.

Commentary from the private sector on regulatory reform mean that many proposals are significantly watered down as self-interest once again predominates in every market segment. The constant threat of moving business elsewhere is used whenever a proposal is mooted that is not in the direct interest of a particular constituency.

What happened to the idea that we could never return to anything like where we had been before? The debate on changing the business models and the culture of financial services appears to have fallen by the wayside.

Except for those who have lost their jobs in financial services, their businesses through lack of credit, or their homes through predatory lending practices, there is little sense that any lessons have been learned or that anything fundamental within the culture of financial services needs to change.

Patience is waning. There is a risk that we arrive at a stand-off, where out of frustration politicians respond to the conflict between populism and bankers’ recalcitrance by becoming ever more shrill in their demands, and bankers become ever more threatening in their responses. We shall end with a ‘dialogue of the deaf.’

What is to be done? Slowly, central bank policy will become less accommodative and banks will have to begin to earn money the old fashioned way again. Bankers, regulators and policymakers need to put away their blatant self-interest to arrive at a domestic and international financial regulatory structure which genuinely serves the good of the economy, the private sector and the general population at the same time. All parties need to recognize that it is worth giving up some of what they feel they need to get most of what they want. This can best be done by open and honest dialogue and debate, not polemics and posturing. Should we miss this opportunity to think collectively and cooperatively about change, there is a good chance that we are currently sowing the seeds of the next financial crisis.

The International Centre for Financial Regulation (ICFR) is the product of cooperation between 19 leading financial services companies together with Her Majesty’s Government and the City of London, and provides training, scholarship and thought leadership on financial regulation. The Centre, while based in the City of London, will serve constituencies well beyond the borders of the UK. Internationally, the ICFR will engage dialogue across borders on effective regulatory cooperation and regulatory best practice; act as a clearing centre for those seeking training on regulation and commission research on regulatory frameworks fit for the 21st Century.

Dimanche 20 Septembre 2009

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