Push ahead with regulatory clampdown

We've been waiting for the clampdown for some time now. A regulatory clampdown – a swath of new rules and dictates aimed at preventing the sort of rolling financial crisis that is now just about in its second year. Quite naturally the authorities had to deal with the symptoms of the crisis, and its spillover effects in the wider global economy, before setting about fixing the underlying problems that caused the crisis in the first place. But over recent months we have seen a growing sense of unease over the issue. There has been a sense that, so swift has been the recovery in sentiment – literally over the past three months – that the big banks would somehow "get away with it". The financial commentariat has been groaning with declarations that our political elite lack the mettle – and the skill – to actually impose hard restrictions on the financial sector. For many bankers, there has been a growing confidence that we are almost back to business as usual. Witness, for example, the extraordinary expansion plans laid out by Britain's Barclays last week. Having sold off its asset management division so as to repair its balance sheet, the bank has instantly set out a plan to quickly become one of the top three investment banks in the world – standing alongside two American titans, JP Morgan and Goldman Sachs. The act of contrition for such firms seems have been muttered quietly and briefly. If the system was shown to be fatally flawed, well that has for some been quietly forgotten. A wake up call belatedly arrived in Washington last week, when President Barack Obama, along with US Treasury Secretary Tim Geithner, unveiled what was billed as "A New Foundation: Rebuilding Financial Supervision and Regulation". A day later, in London, the Governor of the Bank of England, Mervyn King, delivered a fiery speech in which he called for his own central banking institution to be provided with the power to break banks up – and, specifically, to divide the casino end of the business, the investment banking arm, from the systemically crucial retail deposit taking entity. A day after that, Philipp Hildebrand, the Vice-Chairman of the Swiss Central Bank (SNB), gave warning that bank intended to also give itself the power to break up the mega-banks on its watch – namely UBS and Credit Suisse. Here, all of a sudden, we appeared to have co-ordinated regulatory and supervisory action, albeit on a loose format. The big banks were being put on notice that, no, we are not going straight back to the old days. There will be restrictions on capital, restrictions on size, restrictions on leverage, and restrictions on business mix. Except there was another story which rather undermined this display of Treasury and central banking muscle on both sides of the Atlantic. Just as Geithner was doing his bit in Washington and King was banging his drum in London, Britain's Gordon Brown found himself entwined in a typical European Union spat over how financial regulation should evolve. At a two-day summit in Brussels, leaders of the 27-nation bloc were expected to approve a plan to create two supervisory agencies – a European risk-monitoring board and a system of financial supervisors – to watch over the banking, insurance and securities markets. But then the plan came under threat over whether an EU-level body should have the right to force a government to recapitalise a stricken bank with taxpayers' money. This was about Britain insisting, within the European bloc, that it would retain ultimate control over its own fiscal policy – the sort of tussle that has been handicapping the great European experiment for decades. All of which illustrated an important point: the global financial system may be inextricably interlinked, but governments are not. The crucial issue that regulators are struggling with is the lesson learnt from the collapse of Lehman Brothers last September. So complex and international were its operations that its failure simply caused the world's financial system to effectively cease up. What the authorities need now is a plan to wind down such an institution if and when the same thing happens in the future. Agreeing a plan to organise that across so many national boundaries is beyond the existing international political infrastructure. Here's how Switzerland's Hildebrand put it: "The 'too big to fail' issue also has a tendency to harbour incentives for banks to enter into excessive risks. In Switzerland, the 'too big to fail' question is particularly relevant and, in many respects, unique, given the importance of the big banks for the country's banking sector and its economy. A clearly defined and internationally co-ordinated wind-down procedure would help to ease this problem. The interplay between national jurisdictions is, however, extremely complex, and finding a solution for a predefined and internationally co-ordinated procedure of this kind is correspondingly challenging and time-consuming." Now, at a superficial level