‘Reforming Financial Markets’, the government’s paper published this week, marks a further step on the road to understanding the true nature of what has happened in the global banking system, and to putting in place the right responses to apply the lessons and make the world’s financial system more secure for the future.
The paper sets out measures to be applied in the UK which make obvious sense, and which implement many of the recommendations made by Lord Turner’s excellent report, published earlier in the year. They will deal with matters such as transparency, monitoring, capital reserve, governance and remuneration. All necessary – but the question remains, is all this sufficient?
The paper picks up on the high quality of analysis that ran throughout the Turner report. We are all now reaching a clear understanding of what brought the global banking system to the brink of collapse. But the biggest question of all remains, at this point, unanswered. Will we have a global solution to what was – and still is – a global problem?
Bit by bit, some of the key players are bringing forward proposals for reforming their domestic banking regulation systems. Washington has mapped out its route, the European Union has set out its plans, and now we have the plans for London. And although the analysis behind each is generally the same, subtle but important differences in the responses are already emerging.
This leaves a huge risk – regulatory arbitrage. The biggest of the global financial institutions will be watching this and waiting to assess the best place to put down roots in this new regulatory world. If they remain free to exploit differences between systems of regulations, we will not have applied the one essential solution – a globally agreed and applied set of minimum requirements.
The UK government’s paper repeatedly acknowledges the need to pursue issues at an international level. It refers to the efforts being made both within the EU and by the G20 participants. Some of the essential pieces of an international regulatory framework are beginning to appear.
But will competing national interests eventually undermine the effort to agree a global regulatory system for a global business? At this stage, there is still a big question mark over whether the emerging systems within the key players will in the end be compatible. It is still not clear whether any international regulatory machinery that may emerge will have sufficient weight to force the lighter touch solutions to raise their game.
‘Reforming Financial Markets’ is an important document, and a necessary step. But the most important plans are as yet unwritten. More significant will be whether the G20 can agree global financial regulation policies which go beyond paying lip service to co-ordination, and actually begin to put in place a system robust enough to meet this global challenge. We will only have the response we need to this crisis when all the leaders of the world’s major economies put their name to another document – ’Reforming the World’s Financial Market.’ There doesn’t seem to be a first draft yet.