GEITHNER'S G20 AGENDA

Although analytically it is convenient to think of the real economy and financial sector as two subsets of capitalism, in reality, they are inseparable parts of the modern
political-economy, with a lot of two-way interdpendencies; finance sector is not just another boat bobbing up and down on the waves and tides of capitalism, but something as ubiquitous and powerfully a third as large in output but much larger in finabcial balances and cash-flows than government. The differences is of course that banking finances are private and dispersed and it is easy for bankers to duck political responsibilities. As we move into an era where banks have to be more macro-economic astute, they will become more politically active. At present that activism is weakened somewhat by needing government generosity of financial support.
The Credit Crunch has been a wake-up call to all to recognise that the interaction between the financial sector and the real economy is strongly influenced by
inter-government policies. The continuing financial turmoil is like a big stress test for theories on the interaction between the financial sector and the real economy and that stress-test is centred on the G20 agenda, about how our preconceptions about how the crisis will play out - the increasingly heard term "exit strategy". The US Treasury Secretary, Tim Geithner, other than Federal Reserve Chairman Ben Bernanke, may be the most important single person in the world of banking, if there is any such individual? At London's G20 agenda meeting the balancing trade-off (of private/public, individual star-players/ regulatory systems) seems to be between gaining France's agreement - and with Germany and ECB that of the EU and Euro Area - for the US & UK priorities in exchange for accepting a French (& EU) priority on reining in bankers' bonuses to pre-empt excessive remuneration from blinding bankers to excessive risk-taking i.e. a change in culture; a halt on where the 'star-culture' is leading, which is also about whether investment banking arms of large banks can continue to do competitive business with Hedge Funds and Goldman Sachs and attract and retain similar deal-makers. Do individuals or systems make the most difference to financial performance and social-economic benefits of banking, and can the governments who have saved banks from collapse dictate a new more macro- and micro- prudential banking culture? It is a perplexing question-of-judgment-balancing; do people or systems, private or public interests, animal-spirits or politics, count for most in how global finance works well or badly. Whose face should be on the dollar, Lincoln or Bernanke? The G20 meeting is therefore about whether the political leaders around the negotiating table can make a difference; collectively recognise the imperatives of what to do about the world's banking systems including the culture of star-player bankers or not? The crisis has eviscerated shareholders of banks and replaced private funding sources and capital reserves with state funding. But there is a mutual dependency and stand-off between banks and governments. Banks have various means to resist government controls, not least by the political insistence on behalf of capitalism as essentially a private matter that government intervention shoiuld be as temporary as possible. Governments are trying to ensure that before they exit their centrally supportive role that the banks are at least subject to new adjusted regulatory controls to ensure that banks recognise their macro-political-economic responsibilities and not simply return to 'business-as-usual'. There is a war being waged between politicians supported by angry general public and bankers on behalf of private finance. Does money or votes count for more in our democracies? The US finance sector as the world's most powerful is the benchmark against which everyone's else's banking sectors are defined, just as the dollar and the US economy dominate world asset values, trade and ouput and therefore G20 is about accepting or modifying or adding to the US agenda, Geithner's agenda:
US TREASURY STATEMENT WITH MY COMMENTS IN BRACKETS
The global regulatory framework failed (yet again for the umpteenth time) to prevent the build-up of risk in the financial system in the years leading up to the recent crisis. (Risk build-up is always inevitable. The global financial system, mainly following a US lead in dispersing credit risk internationally, but in debt markets of structured finance the originate-to-distribute model became an originate-to arbitrage model, with the effect of prolonging the peak of the credit/economic cycle by 2years thereby creating a stronger financial impact on the inevitable Anglo-saxon recession to produce a shock that became a brief Global Recession).
Major financial institutions around the world had reserves and capital buffers that were too low; used excessive amounts of leverage to finance their operations; and relied too much on unstable, short-term funding sources. (They were too low by being predicated on the recent past, not on future unexpected worst case - macro-model failure, ignorance or resistence to? Banks/bankers were not prepared to accept that they have collectively - and individually in the case of the biggest banks - a responsibility to be prudent by caring about the wider economy and their role in it a role that is not defined anywhere within the system except by the Basel II Accord issues on 'pro-cyclicality', something not taught by accademics, accountants or in Economics 101, and something that they are not motivated to care about by shareholders, by bonus remuneration, or by government tax & penalty-setting powers.)
The resulting distress, failures, and government bailouts of these firms imposed unacceptable costs on individuals and businesses around the world. (This is an inexact statement that is only believed by populaist political opinion. Bailouts removed half the pain so that individuals and businesses are in reality only having to cope with the equivalent of a relatively normal recession. The funding of bailouts is off-balance sheet of central governments that taxpayers' money so far is very little used. Furthermore, also rarely statd, the asset balloon build-up in credit-boom economies with massive trade deficits, US especially, that preceded the crash was a bonus to emerging market poor countries by giving them 2-3 years extra foreign investment inflows and trade surpluses, which were positively transformative, transferring from rich world to poor-world in a few years the financial equivalent of decades-worth of aid!)
Going forward, global banking firms must be made subject to stronger regulatory capital and liquidity standards that are as uniform as possible across countries. (This is already happening in a process preceding the Credit Crunch by 12 years). Today the Treasury Department set forth the core principles that should guide reform of the international regulatory capital and liquidity framework to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy. (This form of words is based on a perspective of banking and even government as merely large important cogs in the engineering machinery of the world economy, like water, transport and energy. Like any cog in a machine consisting working with other cogs, no cog can be allowed to spin at its own self-determined speed; it cannot have an agenda of its own. This is not a view of finance sector necessary restraint that appeals to the imperial egos of big bonus bankers. After all, the whole ethos of 'private' capitalism is that it should not need to take account of public interest, of the wider economy. The US Treasury proposes the following:)
1. Stronger capital and liquidity standards for banking firms:
Capital requirements should be designed to protect the stability of the financial system, not just the solvency of individual banking firms, including banks, bank holding companies, financial holding companies and large, interconnected firms. (We have minimum regulatory capital to cover worst case expected losses plus economic capital buffers for unexpected losses, which has been increased, and maybe now we may see a third category of systemic risk capital buffers? These should vary according to the too-big-to-fail relative size of banks.)
2. Capital requirements for all banking firms should be increased, and capital requirements for financial firms that could pose a threat to overall financial stability should be higher than those for other banking firms. (higher capital reserves means reduced leverage and reduced speed of asset growth).
3. The regulatory capital framework should put greater emphasis on higher quality forms of capital that enable banking firms to absorb losses and continue operating as going concerns. (This is saying that too much of banks' business models shifted from traditional funding from deposits to wholesale funding by borrowing and investment trading on the banks' own accounts rather than merely charging for services delivered to customers and clients.
4. The rules used to measure risks embedded in banks' portfolios and the capital required to protect against them must be improved. Risk-based capital requirements should be a function of the relative risk, including systemic risk, of a banking firm's exposures, and risk-based capital rules should better reflect a banking firm's current financial condition. (Giving systemic risk more prominence in the Basel Accord also means more prominence for liabilities, for liquidity risk, which were relatively under-played in the Basel Accords I & II, which are the basis for global banking regulation.)
5. The procyclicality of the regulatory capital and accounting regimes should be reduced and consideration should be given to introducing countercyclical elements into the regulatory capital regime. (These considerations are already there, but not systemetised in detail. Basel II authors and regulators repeatedly expressed concerns for sensitivety to pro-cyclicality risks i.e. banks knee-jerk responses to cycle downturns thereby making recessions deeper and longer. The risks are that while Government seeks recovery by deficit-spending to pump new circulating-money into the economy banks would be cancelling loans and not making new loans thereby sucking circulating-money out of the economy.)
5. Banking firms should be subject to a simple, non-risk-based leverage constraint. (This is the Comptroller of the Currency view that capital reserves should be a ratio to gross assets, not merely to risk adjusted assets net of risk-adjusted collateral and hegding. This leverage constraint could be a major restriction on derivatives generally though aimed specifically at arbitrage in credit derivatives.)
6. Banking firms should be subject to a conservative, explicit liquidity standard. (This will force banks to seek more government treasuries as part of their reserves and less reliance on shareholder equity. In consequence, banking growth will be constrained more by government deficits - bond issurance - and more controllable by central banks money market actions in dictating banks' CB deposits and short-end treasury bills - liquidity windows.)
7. Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability. (The short end official money markets is essentially for unsecured short term lending & borrowing and is entirely for developed economy banks and governments only. Non-banks resented this and effectively created Money Market Funds and Credit derivatives to emulate siilar liquidity leverage, but by creating longer-lasting securities built up a massive credit derivatives inventory that became the focus of much leverage arbitrage that when it unravelled could bring down the world's banking system - the so-called ' financial weapons of mass destruction'. Hedge funds deny they are responsible for the Credit Crunch. There will be a major series of battles over the next few years o see how much that is unregulated & over-the-counter - off-exchange - and how much will become regulated & on-exchange.)
7. A comprehensive agreement on new international capital and liquidity standards should be reached by December 31, 2010 and should be implemented in national jurisdictions by December 31, 2012. (We may interpret this as the dates and therefore the announcement of Basel III Accord - or Basel II+?).