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Financial Regulation: How to Find the Right Balance

JP Morgan's multi-billion punt is the latest evidence that the financial sector remains a minefield five years on from the initial crisis. Despite the efforts of regulators there is a vacuum at the heart of financial global governance.
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The scales of financial justice are tilted by avarice and the power the investment bankers continue to assert. JP Morgan Chairman and CEO Jamie Dimon pleads mea culpa for his part in the US$ 2 billion (and counting) derivative trading loss. Dimon and his staff were not hedging, they were speculating and came unstuck. What we have is another warning of the "too big to fail" syndrome. In this case size does matter because when leviathan banks are exposed and need propping up, the taxpayer foots the bill and public services are cut.

JP Morgan's multi-billion punt is the latest evidence that the financial sector remains a minefield five years on from the initial crisis. Despite the efforts of regulators there is a vacuum at the heart of financial global governance. We have global financial markets and global electronic trading with enormous flows of capital across borders but the supervisory mechanism is flawed. The Financial Stability Board does not have the necessary powers of enforcement -- it is a policeman without a baton. The European Union now has the European Banking Authority and surely the time has come for a Global Banking Authority which is independent and has real teeth, able to identify emerging risks. We do not just need a cop on Wall St or a bobby on the London Square Mile beat. What is required is a new financial global policeman or an Interpol for financial supervision to catch the financial jaywalkers and serial offenders.

The necessity of regulation and structural change to the world's banking system has been recognized by a raft of new legislation and proposals, the foremost being the Dodd-Frank legislation in the United States, Sir John Vickers' Independent Commission on Banking in the United Kingdom and the European Commission which has launched a high level consultation on reforming the structure of the EU banking sector. A move in the right direction but one which will not succeed without a change in banking culture and the bank bosses have made it abundantly clear that they will fight to maintain the status quo. Those working for sensible regulatory change should prepare for a renewed lobbying onslaught by bankers determined to influence the process to keep "business as usual".

A recent report by UNI Global Union ("Coining it in," Andrew Bibby) sets out how a section of investment bankers are already waging a cynical and effective campaign to influence the public and parliamentary decision-making institutions to prevent adequate regulation of the financial markets. The G20 has abrogated its responsibility to the Financial Stability Board which is trapped between the rock and the hard place of the financial community and the national financial ministries. The result has been an inability to deliver prudent banking rules. Government reforms are too modest and are barely laying a glove on the financiers who still regard themselves as the Untouchables. Fraudulent and criminally negligent investment bankers who bear a significant responsibility for the crisis have not been brought to justice. The bonus culture has remained unchanged and indeed a recent report published by Johnson Associates predicts bigger bonuses this year than last.

Let's be clear we are not criticizing bank workers of whom more than 750,000 have lost their jobs since the crisis began while only a handful of banking CEOs have been dismissed. UNI's finance sector represents more that 200 unions and three million workers and we are aware that this is not a zero sum game between bankers and the public. A balance has to be struck and what is essential is to regulate between the essential and positive banking services and their shadows. We have a long way to go to ensure that the regulatory framework in place will avoid another financial catastrophe. We must signal to the world's decision-makers that they have to deliver on improving financial regulation and that significantly not enough has been done to change banking behavior and culture.

Firstly, we need a clear distinction between core banking services indispensable to a market economy and other more exotic activities. We have a situation where all kinds of behavior are underscored or protected by the public purse. This is generosity bordering on madness and leads to a distorted and vulnerable market. A regulatory net has to be thrown over shadow banking to ensure that certain financial instruments, that only a handful of mathematicians profess to understand, do not continue to proliferate and endanger the market.

Secondly, the distinction between risk and fraud must be clearly defined and the courts given greater punitive powers to punish those who cross the line.

And thirdly, a bank's board of directors should be robust and independent and not made up entirely of the bankers it should itself be policing. Such a balanced board would be capable of seeing beyond the sort of profit maximization that has led to a high risk game and fraudulent activity.

These basic measures coupled with some of the regulatory reforms and structural reforms in the banking sector already on the table would help redress the balance of financial regulation in favor of a more just society.

Philip Jennings is General Secretary of UNI Global Union and a speaker on the OECD Forum panel, "FINANCIAL REGULATION: HOW TO FIND THE RIGHT BALANCE"

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