Monday January 25, 2010

Pressure for bank reforms to rise at Davos meet

ZURICH: Pressure for bank reforms is set to grow at a gathering of the world’s elite at Davos this week, shortly after US President Barack Obama set the stage with an offensive against Wall Street excesses.

However, emboldened by a growing economic recovery, bankers – who were conspicuously missing from last year’s World Economic Forum meeting in the Swiss mountain resort – were set to fight back in vocal fashion, experts said.

Excessive risk-taking by the banking industry has been cited as one of the causes of the recent financial and economic crises and regulators have been tasked by top politicians to draw up new rules to rein the banks in.

But as the world slowly emerges from recession – the worst since the Great Depression – opposing voices from banks on these new rules are growing louder.

“The lobbying is getting very strong and the political will can be diluted quickly,” warned Cedric Tille, professor of economics at the Graduate Institute for International and Development Studies in Geneva.

“It’s urgent to put these reforms in place,” said Tille, a former economist at the Federal Reserve Bank of New York.

Proponents of the reform would find an ally in Obama, who announced plans on Thursday to prevent banks or financial institutions in the United States from owning, investing in or sponsoring hedge fund or private equity funds. The new rules would force firms to choose between activities such as trading in stocks and sometimes risky financial instruments for their own benefit – and traditional activities, like making loans and collecting deposits.

The Group of 20 (G-20) leading developed and emerging economies has also asked for new rules to clean up the sector, with more stringent requirements on capitalisation and debt ratios due to be introduced by the end of 2012.

Rainer Skierka, an analyst at Bank Sarasin, noted that the new rules were unpopular since they could generate costs and cut the profit margins of banks. In addition, banks would be required to set aside more money as capital – reducing the funds they could use for investment to generate better returns.

“Banks are doing intense lobbying as the new demands on capital reduces their profits,” said Tille.

Bankers were likely to be more vocal in their lobbying against the reforms, said Nariman Behravesh, chief economist at IHS Global Insight.

“A lot of bankers can’t wait to get out of the control of governments. Some feel so stifled,” he said. “They are going to do everything they can to resist the reforms. They will be more vocal this year.”

Bankers and finance ministers are to sit together on Wednesday to discuss “structural deficiencies (that) persist in the regulation of systemic financial risk,” according to a programme of the Davos meeting circulated by organisers.

On Saturday, the focus will be on how the largest financial institutions in the world should be regulated.

Central bankers like the European Central Bank’s Jean-Claude Trichet as well as Egypt’s Finance Minister Youssef Boutros-Ghali and French Economy Minister Christine Lagarde, were expected to pile on the pressure, analysts said.

Regulators have cautioned that reining in banks is becoming a key issue, particularly now that governments have shown that they were willing to bail out ailing banks in a financial crisis.

“Before the crisis, you didn’t know how states were going to behave in the event of a crisis,” Switzerland’s central bank chief Jean-Pierre Roth observed recently before he retired.

“After the crisis, the head of a major bank knows that in case of a major crisis in the future he can count on state backing, and that’s the parameter that has changed fundamentally.” — AFP

The pre-crisis ambiguity had broadly encouraged greater prudence, he added.

Roth cautioned that its loss now posed a “fundamental problem”, hence the need for regulation to take over. — AFP

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