Financial Sector “Must Be Willing to Reform Deeply and Ethically”

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Aug 16, 2012
by Louise Hallman
Financial Sector “Must Be Willing to Reform Deeply and Ethically”

Bankers, regulators and financial experts come to Salzburg to bridge global differences

On September 15, 2008, the USA’s fourth largest investment bank, Lehman Brothers filed for bankruptcy. Lehman's bankruptcy filing was the largest in history and its demise was watched in horror in political, financial and economic centers across the globe. Almost exactly five years on, the global financial crisis shows little sign of abating.

It is against this backdrop financial market turmoil, which since Lehman’s collapse has worryingly developed into a protracted, full-scale global financial crisis, that government officials, legislators, regulators and supervisors, bankers, lawyers, academics in economics and finance, and financial journalists are coming together in Salzburg, Austria for the Salzburg Global Seminar session ‘Financial Regulation: Bridging Global Differences’ on August 16-19, 2012.

“The timing for discussing international co-ordination in financial regulation could not be better,” says SGS faculty member and Deutsche Bundesbank Executive Board member, Andreas Dombret, with fellow faculty members, Edward Greene, senior counsel at leading international law firm Cleary Gottlieb Steen & Hamilton, and Andrea Enria, the chairperson of the European Banking Authority in London agreeing that now is a “crucial” and “delicate moment” for the banking sector.

The timely session will consider the greatest challenges facing improved global co-operation and the financial regulation sector as a whole, opening with a keynote speech from the co-chair of the session, Economic Advisor to US President Barack Obama and member of the Trilateral Commission in New York, Paul Volcker.

The challenges and issues facing the sector are vast and wide, with new scandals hitting the headlines each week – in the past few months alone, tales of the $2bn JP Morgan loss, the LIBOR rate fixing and this week’s news of Standard Charter Bank’s alleged assistance in Iranian government laundering $250 billion have all hit the newsstands – as well as the ongoing euro-area sovereign debt crisis, which Dombret insists must not “be an excuse for delaying much-needed regulatory reforms.” 

“The political window for agreeing to and implementing legally binding international frameworks in the wake of the financial crisis is limited. Now is a crucial time…while there is still impetus for reform and before divergences become further embedded in the evolving architecture of the international financial system,” says Greene.

Since the beginnings of financial crisis in 2008, regulatory authorities across the world have undertaken efforts, including the Dodd-Frank legislation in the US, the financial regulation reform package agreed in Europe, and the "Basel III" accord on capital requirements for financial institutions. However, these efforts have not been enough; many issues still remain, including the creep of regulatory arbitrage, transnational divergence and inconsistency in financial reform efforts.

These delays in reform and the seemingly never-ending stream of scandals emerging from the banking sector, together with the huge amounts of public money poured into the banks in the early days of the crisis to stop a repeat of Lehman Brothers or another Northern Rock-like bank run, has increased public resentment towards the financial services industry, and subsequently also towards the governments seen to be unquestioningly backing them.

“In my opinion,” Dombret states, “solving the ‘too big to fail’ problem will be the litmus test of financial sector reform. The taxpayer should never again be stuck with the tab for financial institutions’ failures…“We must return to a founding principle of social market economy: individual responsibility. Those who take risks must also face the consequences.”

David Wright, faculty member and Secretary General of the International Organization of Securities Commissions (IOSCO), based in Madrid, Spain, also acknowledges the importance of the return of responsibility to the banking sector, and supports stronger actions to be taken against those whose behavior is irresponsible.

“The financial industry…must stop being in denial and make major changes to its long term behavior,” says Wright, who will feature on the panel discussing the role of the 2009-established Financial Stability Board and its potential as a focal point for global co-ordination.

“They must accept that given what has happened much stronger regulatory and supervisory oversight is required of this industry; much tougher sanctions, including more frequent use of jail for miscreants; much greater levels of transparency at all levels; and radical change in boardrooms to ensure boards and management are competent, responsible and mandated to follow best corporate governance practice.

“Responsible leaders in the financial industry must step up to the plate and fully support global regulators introducing these necessary reforms. 

“Unfortunately,” Wright adds, “there have been few examples recently.”

“Banks often claim that the reform will adversely impact lending to the real economy, hampering the recovery and the exit from the crisis,” says Enria.

“But delaying the action for regulatory repair is not the right answer, as only stronger and safer banks will be able to support the real economy.”

“No one should underestimate the importance of this task,” says Wright, “The cost so far of this crisis being estimated at around 10-15% of global GDP with most of the costs of this damage falling on blameless, decent, ordinary people…

“The financial sector as a whole bears the largest responsibility for the severe damage caused by this crisis. It must be willing to reform, and reform deeply and ethically.”

But if there is such need to reform and much consensus around this need, why have efforts to secure this reform thus far fallen short?

One key issue is national divergence; despite the high-level international attempts to solve the crisis, individual countries have not implemented a consistent approach to the much-needed reforms.

“[I]t is important to ensure a global level playing field in financial market regulation. Countries must not be allowed to create competitive advantages for market participants or financial centres domiciled in their jurisdictions at the expense of others by implementing internationally agreed reforms only half-heartedly or belatedly... [I]mplementation will have to be monitored rigorously by international bodies,” says Dombret, who will be leading the session’s discussions on the international co-ordination needed to achieve this regulatory reform alongside co-chair Jacques de Larosière, Chair of the High-Level Group on EU Financial Supervision and Senior Advisor for BNP Paribas in Paris.

With the goal of bridging the global divides that exist, the Salzburg Global Seminar session will look to address the great divergence in regional and national approaches, comparing the European Union with the USA, and looking to how other regions, such as Asia, are also responding to the recommendations on financial regulation as made by the G-20, the group of the world’s 19 largest economies plus the European Union, which has been meeting to discuss the global financial crisis since 2008.

The session will also see working groups consider what a treaty-based multilateral supervisory framework might possibly look like. Other key issues to be covered will also cover how mutual recognition and formal international agreements might help achieve the goals of the G-20, and what stumbling blocks remain in the adoption of international accounting standards as called for by the G-20.

As well as the planned questions to be discussed, there will no doubt be many more.

“Are we sure we are focused on all the essential elements of global financial reform?” asks Wright ahead of the three-day seminar.

“Are we sure that the sum of the interconnected policy reforms will enhance sustainable long-term economic growth? Will they be all implemented at the global level? Is the present constellation of global regulatory financial bodies sufficient? Or are further integrationist steps required? If so, which?”

All these questions and more will be raised over the three days at Schloss Leopoldskron, and whilst many may remain unanswered and unresolved, the faculty remain hopeful that much will be achieved.

“I hope the discussion during this session will allow identifying the key steps that still need to be taken to enhance international consistency,” says Enria. 

Greene adds, “I hope that the insights and lasting relationships developed through the conference will lead to the formation of innovative regulatory reform proposals and promote greater cross-border cooperation and coordination going forward.”

Doubtless, there will be much road on which to go forward in the journey of lasting and effective financial reform.


Salzburg Global Seminar session ‘Financial Regulation: Bridging Global Differences’ runs August 16-19, 2012. Lecture materials and audio recordings of on-the-record discussions will be made available after the conclusion of the seminar.