Politics and policy
It was certainly a disappointment to see US President Barack Obama recently announcing banking reforms on such an unprecedented scale without reference to the global community, and in particular the G-20. He wants to do two things: the first is to limit the size of banks to get rid of the ‘too big to fail’ dilemma which costs taxpayers money when banks are threatened or go under. The other is to limit the risky activity of banks with insured deposits, from owning or investing in hedge funds and private equity.
Hardly surprising then, at the World Economic Forum in Davos at the end of last month, that well-known banking names were out in force to protest against this disjointed approach and to warn western governments that eliminating proprietary trading and breaking up big banks would do little to prevent a further crisis. They have a point. Would limiting banks’ proprietary trading (which is a tiny proportion of their business) have stopped the financial crisis? Probably not. But is this legislation likely, as bankers say, to halt nascent economic growth? Probably not. More importantly will this legislation create regulatory arbitrage as different countries apply different sets of rules and make business fiendishly complex? Probably it will.
Whether you agree, disagree or are indifferent to the various regulatory proposals being put forward (see last month’s Treasury Today for an in-depth look and analysis of how regulation might impact your business this year), as one banker pointed out while leaving Davos, one of the challenges for companies going forward will be to become totally flexible in their risk policies and to be aware that this flux of rulemaking may have more than downside. It may also present some opportunities, or loopholes as he gleefully called them, for banks to exploit the differences between various jurisdictions. So much for level playing fields.
If every country pursues its own set of reforms, and meanwhile has oversight bodies, committees and other influencers like Basel, the IMF, the G-20 and the EU adding to that mix, then transparency will suffer and simplicity will cease to exist. Companies will find doing global business far more complex and expensive. It simply isn’t productive.
Much of the posturing and rhetoric of various countries was clearly weakening as Davos came to a close (after all the World Economic Forum has no policymaking remit). European government representatives were no longer dismissing Obama’s proposals outright and seemed to be mulling over how they could be adapted in Europe. The trick will be for governments and global reformers to achieve a balance. There’s nothing wrong with regulators pursuing their own national legislation to strengthen banking within their own countries, but it has to be done with reference to global moves as well and less to do with populist initiatives.
The devil will be in the details and we will be watching this in the coming months to keep you up to date with alerts on the issues as they unfold. Heightened vigilance in countries that retrench from the global view, will be required.