European Heads Lead Calls For Bank Regulation

Debate on Bank Regulation

First Published Date : September 7, 2009

The G20 summit in Pittsburgh later in September will feature some lively debate on bank regulation after the heads of Europe’s three most established economies all put their names to a letter stressing that the 20 richest countries in the world must take steps to regulate their banking sectors. British Prime Minister Gordon Brown, German Chancellor Angela Merkel and French President Nicolas Sarkozy penned the joint letter ahead of this month’s summit in the United States, each of them aware of the revulsion which has met increasing stories of bank bonuses amid the financial storm of this year and last. Despite likely allegations of populism – which would hardly be inaccurate – the words of the three are likely to be echoed by voters.

Much of the ire raised among the financial crisis has been the result of banks which have taken large amounts of government bailout money moving to pay out much of it in bonuses. This puts some banks in a tricky position. In many cases these bonuses are a contracted issue and withholding them would put the banks in breach of their contracts to employees. However the bank is performing on the balance sheet (and those requiring bailouts have clearly not been touching the sky), if the individual executives have been delivering the numbers stipulated in their contracts then the bonuses are owed to them by right. As much as the rest of us may be moved to shake our fists at the injustice of it all, ignoring contract terms would put companies on shaky legal ground.

The moves proposed by Europe’s Big Three, then, will deal more with what can be offered in the future – and it seems that they have little thirst for a return to the practices which many blame for the crisis itself. In the words of the letter the lifting of financial tensions has resulted in many of the world’s financial institutions assuming that a return to old practices could be acceptable. It is many people’s view that “bonus culture” encouraged high-risk practices which are blamed for much of the difficulty in which the global economy still finds itself.

Although the three leaders collaborated on the letter, it is known that they are not in total agreement between themselves. While Nicolas Sarkozy views it as essential that bonuses should be capped at a certain level, his opinion is not quite backed by the Brown administration which feels that the plan is unworkable and favours the option of clawing back some of the bonuses after a period of time if long-term results are seen to have suffered. Consensus may be hard to reach in time for Pittsburgh, but publicly leaders are saying that it must be reached then in order for a firm line to be drawn on the subject. With the recovery of stimulus payments also set to be discussed in Pittsburgh, it could well be that there are disagreements aplenty around the table when the finance ministers sit down to talk.