Take a hard look into the burning embers of the international financial meltdown and ask what changes do you see? An answer comes from the Governor of the Bank of England, Mervyn King, who says: ‘Anyone who thinks the world has changed hasn’t read history.’ Despite the wisdom of this world-weary observation there are signs of both a fragile recovery and also positive moves to build and maintain a more stable financial future for Europe and perhaps the rest of the world.

Cautious
Talk of economic recovery remains cautious, with the Bank of England warning that the current signs of recovery could prove to be a “false dawn”, despite issuing (in September) a relatively upbeat economic forecast which also revealed that none of its policymakers saw the need to expand the asset purchase stimulus during this month.

This caution was also echoed by Dominique Strauss-Kahn, head of the International Monetary Fund, in a recent speech given in New York: ‘Financial conditions have improved and the growth engine seems to be starting up again. Not so long ago the global economy stood at the edge of an abyss, however, the crisis is by no means over.’

Reforms
Meantime, just how the financial house will be put in order is a challenge currently high on the agenda at the EU’s high table. The EU has recently unveiled plans for new ‘super-regulators’ across the banking sectors in Europe. The proposals include a European Systemic Risk Board to warn of future risks; this would include watchdogs overseeing banks and insurers across the EU’s 27 member nations. These measures, says the European Commission, are necessary in order to prevent another financial crisis, while suggesting still deeper reforms may be on the cards.

The reforms, unveiled by European Commission President José Manuel Barroso, are the first attempts to create supra-national regulators that can overrule local watchdogs. As well as a new systemic risk board, which would be staffed by the European Central Bank and based in Frankfurt, the EU has proposed three new bodies to watch banks, insurers and exchanges. ‘Our aim is to protect European taxpayers from a repeat of the dark days of autumn 2008, when governments had to pour billions of euros into the banks,’ Mr Barroso said.

The UK, with London as the largest financial centre, has signalled unease at giving over some of its powers to Brussels, and reports say that the UK wants Mervyn King to sit on the new risk board. The word on the street is that the UK is proposing that King, the governor of the Bank of England, should be the deputy chief of the new board to make it more palatable. However, a Bank of England spokesman denies this, saying discussions are ongoing and it’s still to reveal a final form of any pan-European regulator.

New rules
In June 2009, the EU agreed at a summit meeting to create regulators that would be able to impose binding rules on national authorities such as the UK’s Financial Services Authority (FSA). Lack of coordination has been blamed for making the financial crisis worse, with national authorities not aware of the true size of banks’ balance sheets within their borders. In addition to the Systemic Risk Board, the other three regulators would be the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority. The regulators would set standards that would apply across Europe, and could order national financial regulators to adopt the rules within one month if they were found not to be complying. If the situation continued, the European Commission could then demand that the national watchdog takes specific action. The proposals need the approval of all 27 national governments, as well as the European Parliament, to take effect.

Social benefit
Meanwhile, Lord Turner, head of the FSA, called on banks to focus on their ‘essential social and economic functions’. He added that the FSA had got ‘quite wrong’ its regulations on the amount of money banks keep in reserve and that excessive risk taking by banks was seen as a factor in the economic downturn.

Banks must focus on restoring the public’s trust in their role, despite signs of economic improvement, Lord Turner said. And he argued that the industry should consider carefully any business that falls outside its core roles, saying that bank bosses should walk away from activities that have ‘no social benefit’. Lord Turner added that they should ‘rededicate and commit themselves’ to their traditional role of deposit taking and lending to individuals and businesses.

The FSA chairman added damning criticism of banks for ‘fooling themselves into thinking that continual innovation of [complex] products was a good thing’, adding that banks had traded these products ‘with far too small slices of capital’ to protect against losses. And he added that an industry that recognises the need to moderate excesses, rebuild trust and embrace reforms to prevent another crisis will prosper.

Just how helpful it is to be critical of banks’ waywardness has been questioned by Lord Digby Jones, former head of employers’ group the Confederation of Business Industry (CBI). ‘Financial services is about 10% of GDP, about 17% of personal taxation revenue and about 23% of business taxation revenue,’ he said. ‘If this nation is going to reduce its debt and keep paying doctors, nurses and teachers, we need a financial services industry and smacking bankers is not the way to go about it.’

Competitive advantage
With the largest economy of all the EU member states, Germany’s opinions on financial reform and regulation are bound to be influential. Ahead of the G20 Pittsburgh summit, German Finance Minister Peer Steinbrück accused the UK of blocking tougher financial rules, saying: ‘There clearly is a lobby in London that wants to defend its competitive advantage tooth and claw.’ Both Germany and France have led calls for more restrictions on banks, which have been resisted by the US and UK. However, the UK Treasury denies blocking more regulation.

G20
While the outcome of the G20 summit currently remains speculative, a draft document suggests that the US will call for major reforms to promote a more balanced global economy. This would see countries in Europe and the US save more, and countries that are fast growing, such as India and China, spend more to boost global growth. A draft document seen by the BBC says huge imbalances in the global economy must be ironed out.

But not all G20 summit partners are enthusiastic about the proposal. Brazil, one of the leading emerging economies, is unenthusiastic about the draft. ‘The way it is, this proposal is obscure and we do not agree with it,’ says Brazil’s Finance Minister Guido Mantega. He adds that the G20 should focus on monitoring the financial system, performing stress tests to determine whether banks need more capital. Indian Prime Minister Manmohan Singh also says the G20 needs to deliver a strong message against protectionism in trade and international financial flows.

Meanwhile, Germany’s Steinbrück says he favours a levy – known as a Tobin Tax – to be applied to every financial transaction to discourage risky lending. He said: ‘It can’t be the case that citizens have to shoulder the cost, even though they did not cause the crisis. That’s why we have to ensure the financial sector makes a contribution,’ adding that, ‘Every euro that we can collect on financial markets will provide relief for taxpayers.’

Fiendishly difficult
The challenge currently facing world leaders is exactly how regulatory reforms can be applied across nations whose economies are in vastly different stages of wellbeing and development, not to mention an inevitable protectionist interest at the heart of many homelands. However fiendishly difficult this problem may be to solve, there is no doubt that some resolve to regulate the financial sector more effectively needs to be put in place if we are to avoid seeing history repeat itself in the future.