Financial reform: banking lobbies are still in control

G20 should not waste their chance to take over the agenda

As the G20 leaders convene in Toronto this weekend, their efforts to reform international financial regulation is entering a critical phase - a phase which will determine whether we will see fundamental changes to the international banking system or merely a return to 'business as usual'

In the wake of the recent financial crisis, a consensus has emerged amongst international policymakers that a new approach to financial regulation is essential to the future stability of the global economy. At the September 2009 Pittsburgh Summit, the leaders of the G20 set out a series of far reaching regulatory reforms to "tackle the root causes of the crisis and transform the system for global financial regulation". The centerpiece of the reform effort was the so-called "Basel III", a new set of capital ade­quacy rules to be drawn up by the Basel Committee on Banking Supervision (BCBS), a group of international banking supervisors, by the end of 2010. Lately, however, BCBS has come under increasing pressure from the banking industry to water down its Basel III proposals, and there are already signs that lobby efforts are paying off.

In a new DIIS Policy Brief - Reforming Global Banking Rules: how the G20 Can Save the Global Economy (see box) - Ranjit Lall, Martin Højland and Jakob Vestergaard ask how we can ensure that the BCBS succeeds in realizing the G20’s vision for a sounder and more resilient financial system. Drawing on the experience of the previous attempt to overhaul global capital standards, Basel II, they propose a set of institutional and structural reforms to the BCBS designed to mitigate the problem of regulatory capture and guarantee that regulators create rules that serve the interests of society as a whole - and not just those being regulated.

The Policy Brief is informed by new research by Lall on the politics of the Basel process, published today in a separate DIIS Working Paper - Reforming Global Banking Rules: Back to the Future? (see box). Taking an in-depth look at the recent history of BCBS, Lall presents a theoretical framework which emphasizes the importance of timing and sequencing in determining the outcome of rule-making in international finance. This framework, Lall argues, has ominous implications for the latest efforts to overhaul global banking rules. Far from a new beginning for banking regulation, it warns us that Basel III may be a case of history repeating itself.