Opinion It takes a country

India is the obvious example for us. Heavily regulated banks,a large number of them government owned,a terribly underbanked population — this is a world away from banking reforms of the kind that G-20 talks about. But there are Western examples. The host country for this G-20 summit,Canada,has a banking sector dominated by a few large institutions that are heavily regulated and where banks were largely untouched by the financial crisis. Canadian bank consumers pay a higher price for services but,as Canadian authorities like to point out,they and the banks are safer. Canada will not have much use for a detailed new global bank rule book either. That’s why it staunchly opposed the idea of a global bank tax. India should have no time for this either.

The argument against a G-20 finance formula however doesn’t depend only on examples like India and Canada. America and major European countries were the epicentres of the crisis,where banks took similar kinds of risks under broadly similar kind of regulatory assumptions — even here the simplest of new bank rules won’t have much meaning in terms of implementation.

Everyone agrees that big American and European global banks that were savaged by the crisis and only survived because of public bailouts need big infusions of private capital. The International Institute of Finance estimates that at the very minimum crisis-hit banks will need around $700 billion (yes,billion) of new equity financing. How to get this money to the banks? How soon? These involve complex questions of national political economy.

Crisis-hit banks are right now still wary of lending to businesses,they would rather make quick money by financial trading,which is what they are doing. Also,they are unwelcome in capital markets. Also,they haven’t crimped on paying out bonuses and dividends. The ideal alternative scenario is that they are given new standards on how much capital they need to keep with themselves,which forces them to,first,pay out less by way of dividends and bonuses,which also makes them go to capital markets for fresh equity,and thus energised they start lending to businesses and become safer.

There’s no way,repeat,no way,this can happen as a supra-national effort. What should be the timeframe allowed for banks before they are asked to raise new capital? That’s a national political question. The quicker the deadline,the more the chances of a short-term but sharp fall in business lending as banks rush to meet new capital rules. That impacts economic growth. Ergo,that’s national politics. European business in general relies more on bank lending than American business. That’s one big difference. One deadline for all countries with crisis-hit banks won’t work.

How fast should banks wind down on paying out bonuses and dividends and start keeping that money for shoring up capital? That’s an especially sharp national political question because political classes across countries and within countries have many,many views on that. But without some across-countries consensus on this a G-20 imposed deadline won’t have much meaning.

Should banks beyond redemption — those so hit by the crisis that even post-bailout they may not be ready for tougher rules — be identified and,if they are,what should be done with them? Again,a sharp national political question. And again,it’s being so shows up the futility of trying to fashion a widely applicable roadmap.

So if G-20 restricts itself to giving heft to some good general ideas on safety,like strengthening bank capital,and ends up far short of producing a how-to guide,it would do very well. The same holds for the even bigger thing many want G-20 to produce: finance reform. Should banks be stopped from becoming too big so that they can be allowed to fail? Just this one question has complex national political implications,and it is unresolvable at the G-20 level. Or take the apparently simple issue of mortgages,which were at the core of the crisis.

In Canada,any home purchase that has 75 per cent or more bank financing is required to be accompanied by a purchase of insurance — a conservative,a priori safety measure. Housing finance in America has been and will be revisited. And after the Goldman Sachs fraud allegations,the political momentum for big reform increased. But can American finance approach Canadian conservatism? That’s only for America to find out,not for G-20 to try and figure out.

Is G-20 another talking shop,then? No. It can usefully occupy itself as a prestigious forum that makes countries more serious about issues from currency reform to energy policy. As Arvind Subramanian pointed out recently,China’s moves on the yuan and India’s commitment on oil price deregulation were both aimed at going to the Toronto G-20 meeting with something to show. Remember,also,that post-crisis,G-20 was instrumental in a coordinated effort to ease trade finance; capital for global goods trade had dried up in the wake of the Big Fear. G-20 can and should play a key role in rewriting the agendas of the World Bank and IMF.

But the one thing G-20 must not try is to rework finance at a supra-national level. True,this is what G-20 thought it would do as it met after the crisis. True,that was the big idea that gave it prestige. But just because an idea is big doesn’t mean it can’t be loopy.

Remember that other big idea on global finance? Twenty or so big US,European banks were showing the way to the world’s financial nirvana. Twenty big governments taking us to new financial nirvana is just as loopy an idea.

saubhik.chakrabarti@expressindia.com