Another financial crisis highly likely, say Sibos delegates

There is a high risk of another financial crisis within the next 15-20 years, according to a poll of Sibos delegates yesterday. Those attending the regulatory reform session voted 74 per cent to 26 per cent that another financial crisis within that period was a high risk.

Though crisis is seen as inevitable, Sylvie Matherat, director at Deutsche Bank (who once represented Banque de France on the Basel Committee on Banking Supervision), was quick to point out: “We cannot escape financial cycles. The objective is not [to avert crisis] by having the economy remain flat. You would not have growth. What we hope is that the regulations help make our economies safer and recovery better than in the past.”

The sheer number of reporting agencies requiring data in various formats with little coordination among regulatory bodies will keep “lawyers very busy for years to come”, said Gillian Tett, US managing editor of the Financial Times, during the session.

The lack of coordination between regulatory bodies – both within the US and internationally – was identified as the biggest worry for banks. Another fear also emerged: activities that once took place in banks are moving to unregulated institutions, or the shadow banking sector, where they escape scrutiny. Moreover, pension funds are investing in risky assets that could negatively affect the future economy.

The sheer number of agencies is staggering. Annette Nazareth, a partner at international law firm Davis Polk & Wardwell, said she believes merging the CFTC and SEC would be a good start. Moreover, the political climate is preventing the kind of needed tweaks and modifications to US laws such as Dodd-Frank, with the Democratic Party fearing any discussion on modifying the law will result in Republicans calling for its full repeal.

Matherat pointed out that while we are better off than we were in 2007, the regulations were, “made in silos. When you add everything together you have to make sure it fits together. You have to check the interaction of all the regulations.”

With regulation comes enforcement. Tett posed the question: have enforcements gone too far? At least 33 per cent of the audience thought fines should be higher, 29 per cent thought they were at an appropriate level and 38 per cent thought fines were too high.

Said Nazareth: “I think there is a lot of political pressure to show how tough they are and of piling on to show they are collecting [fines] from wrongdoing.” Using fines to remediate past ills was worrisome. Shareholders are being penalised and fines and over-regulation have a chilling effect on foreign banks operating in the US by reducing employment and lending opportunities. In some cases the cost of mortgage settlements for homeowners caught up in the financial maelstrom are being born by banks that didn’t even own the debt.

Nevertheless, Barbara Novick, vice-chairman of BlackRock, put the fines levied against US banks at $70 billion and foreign banks at $20 billion. “Some of the behaviour has been reprehensible. We need an ethics class.”

Tett asked if enforcement would be effective in preventing future transgressions; 41 per cent said yes, 31 per cent no.

At least one audience member asked why the panel on regulation was all female, wondering whether a crisis would have been averted if more women were in senior positions at the world’s financial institutions.

It goes beyond gender. Matherat, who went from Banque de France to Deutsche Bank called for diversity of gender, culture and nationality for better outcomes.

When asked had there been more senior women in banking whether the turmoil of the past five years and the reaction to it would have been different, the audience responded thus: yes, 78 per cent (female voters) and 57 per cent men. Of the noes, 43 per cent were male and 22 per cent female.