By Gordon Platt
It looks like there could be significant reform of the global banking system after all. US Treasury secretary Timothy Geithner pushed for meaningful reform at a meeting in London of Group of 20 finance ministers and central bank governors on September 5, saying the markets alone could not solve the issues. Geithner made it clear that there will be no return to business as usual, now that the financial crisis has subsided.
Everyone at the meeting agreed that excessive risk-taking by highly paid bankers was one source of the crisis, Geithner says. While the G-20’s proposed crackdown on bonuses attracted much media attention, a bigger accomplishment may have been Geithner’s success in getting the G-20 finance leaders to support his proposal for higher bank capital requirements and lower leverage. The stricter rules could force leading European banks, particularly those in France and Germany, to raise more high-quality capital in the form of shareholder equity. In return, the United States would adopt Basel II risk-based capital rules.
In addition, the G-20 insisted on stronger regulation and oversight of systemically important financial institutions. These banks must develop contingency plans, or “living wills,” that would make it easier to dismantle them at a time of crisis. Major cross-border firms would have to establish crisis-management groups to strengthen international cooperation.
The G-20 finance officials said in a joint statement that proposed new compensation practices would prevent excessive short-term risk-taking, helping to mitigate systemic risk. They called for global standards on pay structure, including deferred compensation and guaranteed bonuses, as well as effective clawbacks to ensure that pay practices are aligned with long-term value creation and financial stability. They also called for corporate governance reforms to ensure appropriate board oversight of both compensation and risk. “We cannot put the world in a position where things go back to where they were at the peak of the boom,” Geithner says.