On September 23 and 24, Pittsburgh will host the meeting of the G-20 leaders of the world's largest economies. I have consistently been surprised by the emptiness of the statements following these meetings ever since President Sarkozy convinced President George W. Bush to hold the first one at the heads of state level a few weeks after Barack Obama's election as President.
The G-20 uniquely regroups the Ministers of Finance and the Central Bank Governors "to bring together systemically important industrialized and developing economies to discuss key issues in the global economy." Never was it intended to be anything else than a technical forum meeting twice a year. It has no power, no administration, let alone any authority.
I am all in favor of geads of state or governments meeting and discussing the global economy. But the G-20 has been used for other purposes: changing the financial regulation, abolishing tax heavens, discussing bonuses, in other words, allowing the European governments to vent their frustration with their inability to act after the financial crisis.
Each country has also approached the G-20 with different agendas, causing a divide between the attending countries -- the United States wants to discuss the management of the recovery of the economy, emerging markets want to raise the issues of international trade and imbalance while European countries, mostly France and Germany, want to push the discussion toward the topic of bonuses.
The discussion on bonuses has not gotten close to a concrete coordination of the G-20 countries. The G-20 Ministers of Finance in their communiqué last week end asked the Financial Stability Board to propose common standards to be discussed in Pittsburgh. The real issue, however, the correlation between compensation and risk taking is essential but not advanced enough to provide any solution. The recent statement of Lloyd Blankfein, CEO of Goldman Sachs is going in the right direction, but will not be sufficient to convince the world that the times of greed and abuse are gone.
The second topic, the capital ratio of financial institutions is a crucial one. But it should be addressed by the Bank of International Settlements, the Bank of the Central Banks located in Basle, not by heads of state. The economy is sufficiently struggling and our planet in sufficiently great danger for them not to get distracted by the technicalities of financial reforms.
The U.S. and the U.K. require more strict capital ratios while continental European banks want to keep the Basle II standards. The reality is that the global economy does not have time to reinvent the regulation. These regulations and accounting treatments are some of the most complex regulatory issues. While I believe the U.S. and the U.K. are right to want to tighten the capital ratios, but this will take time and a lot of political might. In fact, the change in ratios promoted by Bill Mc Donough, Tim Geithner's predecessor at the New York Federal Reserve, have actually been implemented around the world except in the United States where the banking lobbies have managed to freeze its application -- we all know the result of that resistance.
It is better to use the current rules and work on a new set of rules for the entire financial system rather than trying to improvise. We need stability, not experimentation. Josef Ackermann, the CEO of Deutsche Bank last week made an unambiguous statement about the need for additional equity. Banks are already operating under a higher equity ratio than before the crisis.
But it is also crucial that similar ratios be imposed on non bank financial institutions, including investment banks and hedge funds.
Overall, the time of the G 20 would be better spent looking at the post -- stimulus world, employment and economic growth, and let others deal with the details of the financial reform.
At least the expectations are low ... Let's hope we will be pleasantly surprised.