The economic and financial powers in the Group of 20 appear to be coalescing around forcing big financial institutions to draw up "living wills," setting up a clash with the many bankers who say the plan would create troublesome paperwork and an impediment to their efforts to back economic growth.
Speaking to reporters yesterday by conference call, a senior Canadian Finance official said a proposal to have systemically important banks maintain a plan for how they would be wound down if they collapsed is gaining traction with the G20, a group that includes developed countries such as Germany and emerging markets such as India.
The official, who discussed the agenda of the Nov. 6-7 meeting of G20 finance ministers and central bank governors on the condition of anonymity, said the idea is to bring clarity to who gets paid in the event of a bankruptcy of a major financial institution.
Perhaps the biggest reason the fall of Lehman Brothers triggered a financial panic last autumn was that no one knew which creditors would get paid after the bankruptcy. Because it, like dozens of other investment banks, operated so widely, the worry over its collapse spread around the globe, causing credit markets to seize.
Advocates of living wills argue that having a bankruptcy plan that's endorsed by national banking regulators would forestall such a panic happening again. But they can expect resistance from the financial services industry.
Bank of Nova Scotia chief executive officer Rick Waugh supports the effort to bring clarity to the collapse of a bank, but called on the G20 earlier this week to agree on common bankruptcy rules, and was notably silent on the issue of living wills.
Josef Ackermann, chairman of the management board of Deutsche Bank AG, said earlier this week the effort to constrain bigger lenders is misguided, calling multinational institutions the "bedrocks" of the global economy.
"Detailed living wills ... would be very theoretical and lead to inefficient corporate structures that would create trapped pools of capital," he told a London conference on Monday. "There is also the danger that living-will arrangements, especially if banks are forced to make them public, will become an open invitation to corporate raiders."
Financial regulation will be a major topic when G20 economic leaders gather in St. Andrews, Scotland tomorrow and Saturday. Another issue is the G20 commitment to avoid domestic economic policies that destabilize the global economy, a list that ranges from debt-fuelled spending in the U.S. to China's controlling the value of its currency to give its exporters an edge.
The Finance official acknowledged past attempts to limit big trade deficits in countries such as the U.S. and surpluses in nations like China have gone nowhere. This time is different, the official said, because G20 leaders have pledged to be accountable, unlike the past, where the issue was left to ministers and the International Monetary Fund.
In Scotland, the goal is a "framework" the G20 will use to oversee global effects of their economic policies. IMF managing director Dominique Strauss-Kahn predicted an agreement will be reached on the weekend so leaders can discuss any policy changes when they meet in Canada in June.
Final agreement on new financial regulations may take longer to achieve. While living wills are fast becoming the consensus, there still are other ideas on how to control bigger banks, including surcharges that would be used to curb the size of financial institutions and pay for any future rescues.
One reason that debate likely will continue past Scotland is that some governments, including Canada's, are wary that any policy that identifies an institution as systemically important risks perpetuating the notion in markets that some banks are too big to be allowed to fail. Those banks end up with advantages, such as higher credit ratings and lower borrowing costs, because investors assume governments will always bail them out.
"We need to be comprehensive in our approach," Canadian Finance Minister Jim Flaherty told reporters in Ottawa yesterday. "So we need to talk not only about larger institutions, but also some of the smaller institutions, and make sure that we're not creating two-tiered involvement by government."
A living will doesn't entirely satisfy that concern, but could emerge as a compromise.
Julie Dickson, the head of Canada's banking regulator and a vocal opponent of identifying banks as systemically important, said in an interview last week that requiring financial institutions to create a blueprint for what they would do after bankruptcy has the potential to avoid failures by forcing banks to consider risks that they might not otherwise face up to until it's too late.
"You don't usually think about the complexity or all the issues that might arise in a wind-up until you're actually faced with it," Ms. Dickson said. "So I would encourage risk on living wills. It's too soon to say how fruitful it will be, but I think it's promising."
With files from Tara Perkins in TorontoReport Typo/Error