The foundations of the global financial sector are still wobbling despite a raft of banking regulations over the last five years since the industry went into meltdown, the World Economic Forum (WEF) has heard.
The annual Davos meeting revealed that banks, regulators and politicians are still poles apart when it comes to deciding how to prevent another financial crisis. The adoption of different strategies in various parts of the world is adding to the confusion.
For William Black, a former United States financial regulator, all the rules in the world will have minimal impact if banks continue to be allowed to fudge their figures with accountancy tricks and executives get away with fraud.
Black believes that it is all too easy for banks to inflate the notional value of their assets or hide losses. “Anyone who relies on computer analyses of the garbage provided by banks will create a massive regulatory failure,” he told swissinfo.ch in Davos.
Even worse, according to Black, the most blatant cases of fraud have gone virtually unpunished. He cited the case of some banks issuing loans to stooge third parties who would buy bank stock to artificially boost capital, only for the loans to be written off.
“There are virtually no elite bankers who caused this crisis who are even under indictment, much less in prison,” Black fumed. “Until regulators understand the fraud mechanisms, and there is no evidence that they even look at these sort of frauds, then it is going to be easy to evade restrictions going forward.”
Accountancy shenanigans were also brought up during a WEF debate. Paul Singer, head of US hedge fund Elliott Management, pointed out that piecemeal regulation in different countries could encourage rule bending.
“In the absence of global standards there will be a race to the bottom,” he said. “You will find that … avoidances of what countries want to achieve will occur, defeating the purpose of trying to fix what has been broken.”
The patchwork nature of new rules is also making it hard for banks to move forward with their new strategies, complained UBS chairman Axel Weber.
Opinion remains divided on which measures – capital buffers, separating retail and investment banks (ring fencing), improving accounting standards, restricting trading on borrowed money (leverage), increasing transparency or boosting the ability to pay off short-term debt (liquidity) – will have the greatest impact.
As a result, regulators in different parts of the world have introduced their own national rules.
“What regulators wanted to reduce was complexity,” Weber said. “They have reduced the complexity of products and funding issues but they have increased the complexity of the regulatory, legal and resolution environment.”
“Operational and legal risks in that environment will be much worse than the financial and investment risks that we have dealt with.”
Furthermore, large chunks of financial sector activity remain untouched by the regulators.
This includes the $467 trillion (SFr434 trillion) derivatives market (complex financial contracts) and the shadow banking sector – made up mainly of hedge funds, private equity firms, funds and trusts.
Another area is bonuses and pay – an issue on which the Swiss public will have a say when they vote on an initiative to curb alleged executive greed in March.
So far, regulators and politicians have just made noises about this issue in most countries in the hope that banks will respond on their own accord, Weber told WEF delegates.
“If that reaction does not come about we will see a lot more hands on regulation of banks’ pay and governance,” he warned.
Throw away the key
William Black, who wrote the book ‘The Best Way to Rob a Bank is to Own One’, advocates a more extreme hands-on approach.
“I can’t think of a single country that has said ‘we are going to root out the fundamental nature of this problem, get rid of all the bad guys and put institutions into receivership’,” he told swissinfo.ch.
“No regulator has experience of putting people into prison. We have a whole generation of regulators trained on failure.”