Skeptics of the G-20 argued before the expansion of the G-8 to including 20 members in 2008 that making the group bigger would not necessarily make it any easier to solve problems. From the looks of things now, such concerns were prescient. Yet another summit, last week-end, this time in St. Petersburg, demonstrated that the differences in interests and political views between the member states are simply too great.
The intended focus of the G-20 meeting had been the global economy, but those discussions were overshadowed by the Syria crisis. The Europeans had sought to push for deeper efforts to combat shadow banks and tax evasion. In principle, the G-20 countries had already agreed that all financial centers around the world would be subjected to supervisory authorities. But things fell apart when it got down to the details. Many emerging countries, but also the United States, don't believe they should have to sacrifice domestic advantages for the sake of greater competition for international capital.
That's why summit participants didn't agree to any concrete measures in the fight against tax tricks used by large corporations. Nor were they able to reach any agreement on tighter regulations for shadow banks, including hedge funds, private equity and money market funds. For now, they have merely agreed to a timeframe: They plan to revisit the issue in November.
Between 2009 and 2011, the governments of the 20 leading industrialized and emerging economies (the G-20) agreed at several summit meetings that fundamental reforms were needed. They were determined that banks should never again be in a position to blackmail entire countries, because they were too big and too closely intertwined with the rest of the financial world to be allowed to fail. That was the consensus reached by world leaders
The G-20 resolutions were followed by many attempts to tame the so called the "monster" of the financial markets. But the results remained tenuous. While it is certainly true that bank bailouts no longer have to be ironed out in hectic, nighttime crisis meetings, it is also true that large banks, especially in the United States, are raking in billions once again. But the new sheen is deceptive, because banks owe much of their comeback to ongoing support from governments and central banks. Instead of having to launch bailout operations worth billions, they have simply turned to a policy of slowly feeding the financial industry with cheap money.
In the euro zone, many banks would have trouble refinancing themselves without the help of the European Central Bank (ECB). A number of institutions are not sufficiently profitable to survive on their own in the long term. The euro-zone countries, fearing the potentially uncontrollable consequences of liquidating ailing financial groups, have helped create so-called zombie banks.
In the last five years, there have in fact been a significant number of new guidelines, laws, drafts and recommendations. The banks were forced to increase the size of their financial cushions, for example, but they still aren't large enough. Regulators devised split banking systems designed to shield customer deposits from risky trading activities, but the concepts are half-baked and have yet to be fully implemented.
The leading industrialized nations agree that banks should be liquidated in accordance with clear rules -- and without adversely affecting taxpayers, if at all possible. Nevertheless, there are still no uniform international principles to achieve this goal. Most countries don't even have an insolvency statute for the industry. Bankers' bonuses were capped, but then their fixed salaries were increased dramatically. Regulators had vowed to rein in the rampant trade in derivatives among banks by requiring it to be conducted on supervised exchanges. Instead, the over-the-counter derivatives market has grown by 20 percent since 2009.
Over the years, lawmakers have lost sight of the most important objectives of regulation. Secure savings deposits, a continuous supply of credit and a functioning payment transaction system are as important to an economy as intact water pipes or power grids. The point is to ensure that this supply functions properly. At the same time, governments and taxpayers cannot allow themselves to be held hostage by the banks, merely because they can guarantee a basic supply of capital.
Who bears the losses? Capital rules are a case in point. At the time of the Lehman bankruptcy, many large banks maintained an equity cushion of only 2 percent of their total assets. The remaining 98 percent was borrowed capital. As a result, even small losses could lead to bankruptcy. Today, this cushion amounts to about 3 percent at many banks. "It's still far too little," says Hau, who believes that an equity cushion of 15 to 20 percent is ideal.
Regulators' notions are still well removed from such quotas. Meanwhile, they are fine-tuning complicated regulations that would require banks to maintain larger capital reserves for riskier transactions, and smaller reserves for those that are supposedly safer. This sounds reasonable, but the amount of risk associated with a deal often only becomes apparent in retrospect. For instance, there are still no capital reserve requirements for many government bonds today, even though hardly anything threatens the existence of banks as much as the sovereign debt crisis. But who else would finance the excessive borrowing of governments?
Part of the job of banks is to assume a portion of the risks of companies, governments and citizens. Banks cannot fully safeguard themselves against financial risks and operate profitably at the same time. But that's why bankruptcies are also necessary, just as in any other industry. Regulation is needed to determine who, in addition to the owners, bears the risk of losses.
Since the Lehman bankruptcy, the creditors of financial institutions have been largely spared. The banks' creditors were often other banks. This leads to chain reactions, like the one that occurred after the Lehman bankruptcy, which can be deadly for the entire system.
So far, this central problem has been neglected in the reform plans. It is argued that banks should be required to obtain a certain portion of their debt from non-banks. Insurance companies and pension funds, for example, would be better able to absorb losses, because they derive their revenues from customer funds committed for the longer term. But bank failures would then affect their customers, putting the pension plans of many people at risk.
In the end, citizens are always left bearing a portion of the risks associated with a good supply of banking services, be it through taxes or losses in their private pension plans. But these risks should be transparent and no larger than necessary. High-risk transactions, such as trading in securities, are not among the risks that broad segments of society should bear. For this reason banks are to be organized in the future so that their consumer services -- deposits, loans and payment transactions -- are largely separated from trading activities and can be spun off at any time.
By Guylain Gustave Moke
World Affairs Analyst
Photo-Credit: AFP-World Leaders at G20's Summit, last week-end, in St Petersburg-Russia