The leaders of the G-20 are meeting in Toronto at the end of this month. This is the fourth in a series of summits after the collapse of Lehman Brothers, organised with the original objective of building ?a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.? Given our experience in the previous three, there is not much to expect from our leaders, and by the end of June the world will continue moving at two different speeds: the fast pace of the US regulatory reform versus the lack of coordination and inaction of European leaders.
A year ago in London, the G-20 members defined the agenda for a worldwide regulatory reform. The pillars of the new era of financial regulation would be new regulations for systemically important financial institutions?hedge funds; oversight and registration of credit rating agencies; the end of bank secrecy; tough new principles on pay and compensation; reduced reliance on complex and inappropriately risky derivatives; improved accounting standards; and regulation to prevent excessive leverage. New rules?it was agreed?required coordination, as leaders realised that unless all countries move in the same direction, economic agents would take advantage of differences in legal regimes, as the crisis had just shown.
Those well-intentioned objectives have now been forgotten. For the Toronto summit, the focus will be on recovery from the global crisis, and the implementation of commitments from previous G-20 summits. Alas, the only commitment that came out of the last summit (Pittsburgh), was to ?reach agreement on an international framework of reform?, that is, to agree to coordinate on how to coordinate.
Where do we stand as the new summit is about to begin? Impressively, the US has now produced, in record time, the most radical regulatory reform since the Securities and Exchange Act of 1933. Already in December 2009 (only seven months after the London summit), the House of Representatives passed, by a partisan vote of 223 to 202, the Wall Street Reform and Consumer Protection Act of 2009. This has been amended and finally approved by the Senate. The Wall Street Act perfectly corrects the failures that led to the 2008 crisis. In particular, it imposes shareholders? approval of executive compensation (say, on pay), thoroughly regulates over-the-counter derivatives, imposes for the first time in history the participation of consumers in the control of financial institutions, makes registration of hedge funds mandatory, regulates rating agencies and strengthens investor protection.
What about Europe? What have Germany, France, the UK, Italy and the like achieved? Well, in the old continent ideas are not that clear. France and Germany have made the regulation of hedge funds and private equity their primary objective, while the UK naturally opposes it. The European Parliament is about to discuss the Alternative Investment Fund Management Directive proposal, which wipes out hedge funds and private equity firms from Europe. There have also been some important agreements with ?tax havens? such as Luxembourg and Switzerland against bank secrecy. And that?s about all. Europe has missed the amazing opportunity that the crisis gave it to become the financial centre of the world, after the failure of what President Sarkozy called ?anglosaxon capitalism?. By the time Europe cleans up the mess, the US will have established its dominance in financial markets again.
So, the US is coming to Toronto with its homework done. European leaders come together again with the hope that someone else will do the work for them. The Wall Street Act teaches us a simple lesson: the need to change financial regulation was obvious. Lehman Brothers and AIG collapsed because they heavily relied on derivatives that were not regulated and their trading was not centralised. Accounting rules created the pervasive effect of allowing financial institutions to book the same asset three, four or a thousand times. Investors were not protected because markets lacked transparency. Understanding these problems would have just required a little bit of finance education for our leaders. But, the last summit of the G-20 in Pittsburgh ended up with a clear determination on Iran?s nuclear capabilities.
Even worse, the G-20 has stated in all previous meetings that their ultimate objective is to lay the foundation for sustainable and balanced growth. Such a beautiful mission is enlightening, but also idealistic and just a declaration of intentions. I bet the Toronto summit will end up with the same statement, so as to appease the electorate in the respective countries and to provide an excuse for the next meeting. I truly hope this one is the last and we truly start working on what matters.
The author is professor of finance at IMD, Switzerland