Author: Norbert Walter (+49) 69 910-31810
November 13, 2008
Leaders of the G-20 countries will meet in Washington in mid-November to discuss the future architecture of the world's financial markets. The invitation to the summit was issued by the outgoing US president. With the financial market crisis having escalated following the collapse of Lehman Brothers, the awareness of the need to overhaul the system has been boosted. Hopefully, the rescue packages in major countries have succeeded in putting out the fire. Now the house must be rebuilt. I hardly dare gauge the chances of creating a solid new structure at this point in time.
Too many of the participants are still too busy cleaning up, laying the blame and feeling sorry for themselves to be able to come up with constructive solutions at the summit. But the task ahead is truly formidable and politically delicate. Also, skilled staff to design the new structure is obviously a very scarce commodity.
No doubt it was right to invite not only those countries that have so far dominated the financial markets to take part in the conference. And no doubt it makes perfect sense to include the emerging markets right from the start this time. Their participation is particularly important in view of their extremely good funding situation. However, when it comes to issues of macroeconomic steering, regulation and institutional development in the financial sector (i.e. the right business model for banks after this crisis), China, India, Russia and Brazil can probably make only small contributions. I hope that the US and Europe have done their homework especially in these areas, and will put forward convincing ideas to achieve progress.
But this, too, may be doubtful. As is the case so often with populist debates, they may help calm people down, but rarely do they help find sustainable solutions. There are suggestions to nationalise the banking sector, and increasing calls to abolish the majority of the so-called financial innovations. Securitisation, short selling and structured finance - all is said to be the work of the devil. Also, only universal banks seem able to survive as no financial institution can function without deposits once the money market gets off track. Under these circumstances, what will be the outcome of the Washington conference in mid-November? At best I expect that a number of working groups will be installed to discuss the highly sensitive and complex issues. The IMF, an international institution designed to monitor macroeconomic policy, will likely emerge stronger from this conclave. As regards supervisory issues, however, the IMF is not qualified. For these topics, the Bank for International Settlements (BIS) and the Financial Stability Forum (FSF) are certainly better equipped. The question as to who should lay down the rules for rating agencies and other financial market participants – including their institutional design and internal governance – is clear, in principle. It must be the international community of supervisory authorities, i.e. the parliaments. But discussion of these complex issues only makes sense if experts on financial markets are involved. Not, of course, to agree on self-regulation. This experiment needs not to be repeated.
Article for "Rheinischer Merkur", November 6, 2008
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