Has the moment passed for bank reform?

September 14, 2009

LEHMAN/A year on from the collapse of Lehman Brothers and there is plenty being written and broadcast about the lessons, the winners and losers and where we go from here.

Amidst all the noise, a relatively short (765 word) commentary from Barbara Ridpath who is head of the International Centre for Financial Regulation (ICFR) — a think tank set up to shape regulatory cooperation and best practice — makes some worthwhile points:


The sector’s problems are not yet behind us. Loan losses, which lag other indicators, will continue to build and cost banks in provisions for some foreseeable time to come. Nonetheless, some in the financial sector are choosing to think the worst is behind them. They hope that systemic change is not longer necessary because they have begun to make money again in such a low interest rate environment.

Legislators are working to implement G20 proposals either domestically or regionally with mixed results. It is remarkable how much easier it was to act in a concerted fashion when the world was in genuine crisis mode. Now that we appear to have stepped back from the brink, political unity has gone by the wayside. Political expediency, partisanship, and the settling of old scores have come to the fore. This is a shame.

It appears that banks have also returned to ‘business as usual.’ Big bonus payments and hefty pay packages for star teams are back in the news and those banks that can afford to are hiring talent again. Governance reforms are mooted, but most teams are still compensated on revenues, not risk-adjusted returns. Most departments within banks continue to see each other as competitors, instead of having a unified sense of identity, teamwork and strategy for their institutions. Shareholder activism on governance issues has not actually increased.

Commentary from the private sector on regulatory reform mean that many proposals are significantly watered down as self-interest once again predominates in every market segment.  The constant threat of moving business elsewhere is used whenever a proposal is mooted that is not in the direct interest of a particular constituency.

Ridpath — who was previously head of ratings for Europe at Standard & Poor’s and has worked as an economist at the Federal Reserve Bank of New York and also at JP Morgan — sums it up neatly when she says:

What happened to the idea that we could never return to anything like where we had been before? The debate on changing the business models and the culture of financial services appears to have fallen by the wayside.

Except for those who have lost their jobs in financial services, their businesses through lack of credit, or their homes through predatory lending practices, there is little sense that any lessons have been learned or that anything fundamental within the culture of financial services needs to change.

Patience is waning. There is a risk that we arrive at a stand-off, where out of frustration politicians respond to the conflict between populism and bankers’ recalcitrance by becoming ever more shrill in their demands, and bankers become ever more threatening in their responses. We shall end with a ‘dialogue of the deaf.’ 

Ridpath isn’t giving us the answers, but she has put her finger clearly on the problems facing those who had hoped for deep-seated reforms.

She starts off talking about the near-miss with financial Armageddon we all had a year ago and ends with the following warning:

Should we miss this opportunity to think collectively and cooperatively about change, there is a good chance that we are currently sowing the seeds of the next financial crisis.

Given that Ridpath’s organisation is meant to bridge private and public sector and was set up with the backing of 19 financial services companies, her thoughts are a good indication of just how divided the various parties already are.

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