Financial reform may fail to avert another Lehman
The collapse of Lehman Brothers a year ago has been likened to the 1994 crash that killed Formula One star Ayrton Senna, in the way it has spurred calls for root-and-branch review of risk in the financial sector.
Senna’s tragedy led to regulatory changes in racing that have been effective; deaths on the track are now a rarity.
But governments are not finding it nearly as easy to make quick and comprehensive changes to financial regulation.
That means risks may remain for another collapse on the scale of Lehman in coming years, though authorities would probably be able to act more decisively next time to prevent a financial crisis from spreading around the globe.
The core lesson from Lehman for governments has been clear — regulating against all future crises is futile but there are ways to limit fallout and need for government bailouts.
Britain witnessed at first hand with Lehman the legal nightmare when a complex, global bank goes under. Its financial services minister, Paul Myners, wants banks to simplify their structures and make “living wills.”
“We need to move to implementation across the EU. The time has come to move from theorizing to action. Simple structures are an essential precondition for effective arrangements,” Myners said.
Patrick Buckingham, a partner at Herbert Smith law firm in London added: “The sheer complexity of the Lehman insolvency has inevitably triggered a desire for a plan for an orderly wind down in the form of a living will, and may also lead to regulators asking for current entity arrangements to be simplified.”
Bankers see the Lehman crash as a major turning point.
“Was Lehman the Senna of international banking? Yes. All the changes to regulation are going to add up to less systemic risk,” an investment banking industry official said.
“But are all the lessons learnt feeding through into policy changes? Only up to a point,” he added.
Leaders of the G20 group of major nations pledged in April this year to strengthen financial supervision.
In the U.S. city of Pittsburgh this month, almost exactly a year after Lehman went bust, they will meet again to reinforce the need for stronger bank capital and wind up arrangements.
But some of the leaders are openly complaining the reforms are too slow or timid. Talk of a new, commonly adopted framework for financial supervision around the world has fizzled out as governments struggle with the nitty gritty of reaching agreements on regulatory change.
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