Treasury Secretary Tim Geithner is going to propose (to his colleagues in the Group of 20 nations), that banks—especially really big ones—be subject to much higher capital requirements. Adair Turner, chairman of the U.K. Financial Services Authority, wants big banks to have to prepare “living wills” that lay out how they will be wound down in case of failure (for more on the “living will” idea, here’s Gillian Tett and here’s Willem Buiter).
All this is prelude to the G-20 finance ministers meeting Friday and Saturday in London, which is itself prelude to the G-20 leaders summit later this month in Pittsburgh. When the G-20 last got together—in London in April—there seemed to be lots of momentum for a major overhaul of the global financial structure. Lately not so much.
The issue is that for the past year financial regulators in the U.S. and Europe have been focused on bringing big banks to health—that is, making them more profitable. But any meaningful reform of the financial system—especially in the U.S. and U.K., where finance came to account for a seemingly inordinate share of economic activity over the past couple of decades—requires making banks smaller and less profitable. Higher capital standards would do this directly (the more capital you set aside for a rainy day, the lower the profits you can rake in today). A resolution regime for giant financial institutions (with or without “living wills”) would do this more indirectly by, among other things, making clear to those who bought these institutions’ debt that they would not be fully protected in case of trouble.
Earlier this year, when this regulatory crackdown was still in the hypothetical future, it was easy to sound tough about it. But now the big banks are making money again. The global economy seems to be recovering. The time to start cracking down is coming soon. Because if big financial regulatory reform doesn’t happen in the next year or so, it may never happen.
