(Reuters) The collapse
of Lehman Brothers a year ago has been likened to the 1994 crash that killed
Ayrton Senna. Like the tragic accident that took the life of the Formula I
superstar, the meltdown at Lehmann has spurred calls for root-and-branch review
of risk in the financial sector.
tragedy led to regulatory changes in racing that have been effective; deaths on
the track are now a rarity.
governments are not finding it nearly as easy to make quick and comprehensive
changes to financial regulation.
risks may remain for another collapse on the scale of Lehman in coming years, though
authorities would probably be able to act more decisively next time to prevent
a financial crisis from spreading around the globe.
lesson from Lehman for governments has been clear -- regulating against all
future crises is futile but there are ways to limit fallout and need for
witnessed first hand the legal nightmare that ensues when a complex, global
bank like Lehman goes under. Its financial services minister, Paul Myners,
wants banks to simplify their structures and make "living wills."
to move to implementation across the EU. The time has come to move from
theorizing to action. Simple structures are an essential precondition for
effective arrangements," Myners said.
Buckingham, a partner at Herbert Smith law firm in London added: "The
sheer complexity of the Lehman insolvency has inevitably triggered a desire for
a plan for an orderly wind down in the form of a living will, and may also lead
to regulators asking for current entity arrangements to be simplified."
the Lehman crash as a major turning point.
Lehman the Senna of international banking? Yes. All the changes to regulation
are going to add up to less systemic risk," an investment banking industry
all the lessons learnt feeding through into policy changes? Only up to a
point," he added.
Leaders of the
G20 group of major nations pledged in April this year to strengthen financial
this month, almost exactly a year after Lehman went bust, they will meet again
to reinforce the need for stronger bank capital and wind up arrangements.
But some of
the leaders are openly complaining the reforms are too slow or timid. Talk of a
new, commonly adopted framework for financial supervision around the world has
fizzled out as governments struggle with the nitty gritty of reaching
agreements on regulatory change.
There is a
strong consensus on core lessons learned from Lehman's failure and the credit
crunch, which forced nations to use over a trillion dollars of taxpayer money
to rescue banks.
The G20 has
publicly recognized the need to monitor risk across the financial system, not
just within certain markets or at individual institutions. This, as well as
moves around the world to make banks hold more capital in reserve, is likely to
limit the extent of future crises.
The G20 also
wants to regulate credit rating agencies to prevent conflicts of interest from
distorting their judgments; supervise hedge funds; and rein in overly generous
bonuses for bankers that could encourage wild risk-taking in the markets.
the lessons of Lehman into action is proving difficult, partly because
governments appear to be losing their appetite for big, controversial reforms
as economies start to revive and change seems less urgent.
Union and the United States, for example, plan new bodies to monitor
system-wide risks. But EU leaders have insisted the new European Systemic Risk
Body can make only non-binding recommendations if it spots a problem, thereby
preserving national sovereignty.
In the United
States, debate still rages on the exact role of the Federal Reserve in
monitoring future risks.
American regulatory structure is in total disarray and what has been proposed
to fix it is partial, and even then there is heavy resistance," said Hal
Scott, Nomura Professor on International Financial Systems at Harvard Law
see us coming out with any significant change to the structure. The right rules
and the wrong system is what we might end up with."
official at a major U.S. bank, "Would the new EU risk body be heeded if it
said the Spanish housing market is overheated? Would a newly systemic Fed have
acted sooner on an asset bubble in the United States?" There are grounds
for doubt in both cases as no government wants to kill a boom, he added.
It is also
proving hard to implement the G20's pledge to create a mechanism to wind up
failing international banks quickly. Countries are quibbling over details of
the mechanism partly because they fear it could mean disadvantaging domestic
creditors in favor of foreign ones.
have become very complex as they seek to exploit national differences in tax
and regulation so a more harmonized global approach to those two issues is also
needed, a tough challenge.
is now recognizing that we need a special legal regime for catching banks when
they fall over," said Simon Gleeson, a partner at Clifford Chance, a law
firm in London.
and practical terms its need is unquestioned, but whether it's politically
feasible is questionable. We have some way to go."
of regulatory reform, banks' minimum capital standards, was thrown into turmoil
this month when U.S. Treasury Secretary Timothy Geithner effectively called for
the replacement of the Basel II set of rules favored by European countries.
pressure from Europe, the United States reiterated its plan to adopt Basel II
which is being toughened up to force banks to hold far more capital in future,
restricting how and the extent to which they can make profits.
bank capital rules will take three years or more to take full effect and actual
detail of new levels has yet to be agreed.
have even been unable to agree on restricting bankers' bonuses, even though
that would be politically popular in many countries.
fear such rules could hurt their financial sectors, which are big sources of
tax revenue -- and if some countries impose tight rules while others do not, banking
business may flow to the centers with looser regulation.
The legacy of
Lehman may therefore be a patchwork of reforms to national and regional
regulatory regimes, rather than an airtight new set of common global rules.
would act more aggressively to limit the damage from financial failures and
prevent it spreading globally, but failures would continue to occur.
won't stop investment banks going bust, but the scale of the fallout won't be
as bad," a banker said.
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