Sunday, January 31, 2010

Davos—Impetus for Change?

MarketWatch; Uncertainty Seen Over Global Bank Regulatory Push
BBC News; Davos 2010: Bankers Hit Out at Regulation Plans
Financial Times; Diamond Lashes Out at Obama Bank Plans

This month a group of the world’s most powerful economic and political leaders will converge in Davos, a small Swiss town in the Alps. The event is the World Economic Forum, started in 1971 to promote education and collaborative discussion on a number of global issues, including corporate risk management, poverty, and climate change. Many distinguished guests are invited, like presidents, heads of state, and foreign ministers; however anyone can receive an invitation by paying for it, as do many corporate strategists, social and political activists, religious leaders, and journalists.

This year the event’s theme is “Rethink, Redesign, Rebuild,” focusing on recovery from the global financial crisis. Although not attending the event, U.S. President Obama is focused on financial reform of the U.S. banking system and has presented a plan to limit U.S. banks’ growth by taxing them based on size and limiting their banking activities. He is encouraging other countries to adopt similar measures in an effort to help improve the global financial system. Even though Mr. Obama did not travel to the event, his ideas are spurring discussion among the event’s attendees. European Central Bank President Jean-Claude Trichet says he supports Obama’s plan for the United States but would like to see it implemented on a global scale. The Bank of England Governor Mervyn King also encourages this approach and has outlined his own plan to reduce the size of England’s biggest banks by requiring permanent pay cuts.

Not every leader supports Mr. Obama’s proposal. German’s BdB Banking Association opposes greater financial regulation and is instead in favor of mandating increased capital adequacy. Barclays president Robert Diamond also disputes the need to reduce the size of banks, arguing that such a plan will have negative consequences on global trade and won’t reduce the risks that banks pose to the global financial system. While Diamond agrees that some level of global regulatory reform may be in order, he thinks that upcoming U.S. and UK elections present local political impediments to achieving that goal. He also believes that President Obama’s plan to charge U.S. banks extra fees will limit liquidity and reduce the number of financial services in the marketplace.

One clear opinion has emerged from both camps: both believe that something must be done to change the global financial system to prevent another crisis. However, most also agree that obtaining international agreement is going to be the most significant, if not complete, barrier to success.

Discussion Question:
1. Can a global financial reform work if not every country agrees to be bound by the same measures?

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