Three years after the collapse of Lehman Brothers, the global financial services system has changed forever. Regulators have grown more watchful and their powers have increased. Revamped banking rules force players around the world to hold more capital and pay their top executives differently. But is the world any better off?
Ironically, today’s milestone comes as the European debt crisis threatens to spin out of control, spilling over into other sectors and potentially sparking a crisis even worse than the last one.
Senior European ministers were warned this week that the region faces the “risk of a vicious cycle between sovereign debt, bank funding and negative growth,” according to Reuters, which said the comments were contained in a report by the influential Economic and Finance Committee. “While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic,” the document said.
It was not supposed to turn out like this. Back in the dark days of 2008 as credit markets were grinding to a halt, G20 leaders put together a blueprint for a stronger, more transparent banking system that would prevent players from engaging in the kinds of activities that sparked the troubles at Lehmans and the mess that followed. The idea was that now that the financial industry had gone global, regulators and policy makers needed a new set of rules that would treat everyone the same.
But things soon got off track as the danger receded and countries went back to pursuing their own interests and politicians joined the fray. In Britain and France new laws were created to put limits on banker compensation. The US government brought in sweeping legislation, essentially redrawing the map of the financial industry. Canada has avoided such punitive measures, but banks in this country are still subject to new international financial rules known as Basel III.
Far from creating a global arena, the response to the crisis has resulted in something more akin to a regulatory mishmash that’s disadvantaged each jurisdiction differently. JPMorgan Chase chief executive Jamie Dimon recently told the Financial Times that the United States should consider pulling out of Basel because the rules are “un-American.” A frequent critic of the wave of financial regulation that came out of the crisis, Dimon argues the tangle of restrictions does nothing but hobble players and restrict profitability, especially in the United States where the sector is a key generator of tax revenue and high paying jobs. The Canadian banks have also expressed concerns, though so far none has suggested dropping out of Basel. “Our strong banks should not be put at a global disadvantage from any new regulations,” said Terry Campbell, chief executive of the Canadian Bankers Association.
The industry mostly avoided major losses from the crisis but players worry that any advantage reaped from that will be taken away the way the rules are implemented. “International coordination among policymakers and regulators, and full consultation with the industry, are key to ensure the workability and coordinated implementation of any new rules,” Campbell said. Analysts say Canadian banks are deeply concerned about new financial rules but may be too diplomatic to approach the issue like Dimon.
The good news is that for all the headlines being generated by the sovereign debt storm, the situation may not be as dire as 2008. This time around it doesn’t involve trillions of dollars of opaque derivatives like the credit default swaps that turned the Lehman bankruptcy into a global catastrophe. “I don’t think there’s any question that we understand the markets better, that we’re better coordinated,” said Howard Wetston, chair of the Ontario Securities Commission said. However, Wetston acknowledged the continued danger of contagion and the long road ahead to implement contemplated measures to reduce risks to the financial system. Jon Levin, a partner at law firm Fasken Martineau DuMoulin LLP who has been retained as an expert witness in relation to legal and banking practices, says the while regulators are “more alert to the problems and frailties inherent in the international and national financial marketplace,” the problem of contagion has not been dealt with.
Is the world better off 3 years after the Lehman Brothers collapse?
