Al-Hayat Monday, July 26, 2010 The bank stress tests conducted by certain countries to verify the reliability of their banking systems and their ability to cope with potential financial crisis, are similar to health checks conducted by physicians to determine the human heart's ability to withstand pressure. However, neither does the latter guarantee the healthiness of the heart, nor does the former guarantee absolute confidence in the banking institutions. This is because banking operations go beyond arid periods in economic cycles during which the tests take place, to the stages of economic boom known as growth phases; these push financial operations into expansion, and prompt banking institutions to taking more risk and hazards, in pursuit of extraordinary gains and profits. In the beginning of the last decade, banks, speculation funds and other investment funds achieved lucrative profits by feeding speculation, in most cases unprecedented risky speculation. And despite the regulations in force prior to the crisis, and the Basel standards (I and II) which guarantee the safety of banking operations and subsequently the depositors' money, the strongest banks in the United States collapsed while major financial institutions failed in Europe, banks and institutions whose assets and deposits exceeded hundreds of billions of dollars. However, several international financial institutions dodged those regulatory standards and systems, in collaboration with political forces. For decades now, the hegemony of money has been dominating politics. Thus, the most major capital markets intervene to sway domestic policies in favor of their interests, and even propel political parties to power with the aim of securing the freedom of their financial operations both domestically and beyond the realm of the authorities' domestic oversight. However, the capital markets and financial institutions' inability to withstand the global financial crisis and economic recession prompted both the developed and emerging nations to enact swift domestic economic decisions, and agree on drafting new policies within the Group of Twenty (G20). Governments had to also pump thousands of billions of dollars to bail out banks and help the economy avert sliding into deadly stagnation. However, this intervention created a problem in terms of the validity of the government using taxpayer money to rescue bank officials, who made fortunes at the expense of these same taxpayers in the first place. However, nothing has changed after the collapse of the U.S bank Lehman Brothers. The banks returned the funds they unconditionally obtained from the governments and have now become free. The markets continue to speculate unimpeded, benefiting from the instability that they themselves primarily fuel. And as much as the values of assets and financial instruments evaporate, bets and stakes increase and massive profits are achieved, allowing bigger bonuses to be paid to the executives of financial institutions. To keep abuses and risks and in check, the United States is attempting to curb liberalization in Wall Street. However, the bill signed by President Barack Obama mid-last week was also the subject of political polarization, as some attempt to appease the largest capital market in the world with the aim of achieving political victory, in particular when the results of the bill's measures take years to materialize. Similarly, it takes time for governments to enact the appropriate decisions in the post-crisis period. In both cases, there is no ‘globalized' consensus, but instead, there are local convictions within the respective sovereign entities, and also according to political whims. This is evident from the attitudes of the G20 member states in what regards legislation that places financial institutions under stricter regulations, oversight and impose major fines on them, and also from the trends observed within EU – in particular the euro zone - member states, and at the level of political parties in the United States and Britain. Politics is thus attempting to restore its sovereignty from the control of the world of finance. It is aiming at disrupting the latter's ability to drag the world economy into a catastrophic failure. In truth, capital flow, including venture capital, benefits from the expansion of globalization, the universal trade regimes and the ease and speed of speculation on assets and equities across continents, and subsequently threatens the world economy. For this reason, the G20 proposals include establishing certain frameworks capable of curbing broad financial liberalization and of controlling speculation or the transfer of assets and equities. The first aspect of controlling risk was mentioned by the Financial Stability Board of the International Bank of Settlements. This body suggested that banks increase their capital, to guarantee self-financing during crises. This is while governments are calling on banks to benefit from the periods of recovery and growth to bolster their capital, to safeguard against potential crises. The banks were also requested to manage their liquidity wisely and prudently, in such a manner that they can endure at least one month when interbank markets shrink. This means that banks must hold more treasury bonds which have fewer revenues but larger guarantees. The second axis of banking regulations deals with derivatives and the riskiest instruments of speculation, in particular credit default swaps (CDS) which led to the collapse of the biggest U.S insurance company AIG, and which was marketed heavily by Lehman Brothers. The value of these operations, which managed to avert governmental oversight and the principles of transparency, increased from 6.4 trillion dollars in 2004 to 57.9 trillion dollars in 2007, or an eightfold increase in just three years. According to the Bank of International Settlements, 92 percent of operations involving derivatives are traded by mutual consent, and thus are undetected by monitoring regimes in place. For this reason, there are proposals for the establishment of clearing houses and for transactions involving financial instruments and derivatives to be registered through a notary. However, such proposals collide with policies that exploit any occasion to incur profits, and with giant financial institutions that fear losing profits. For this reason, pundits are divided regarding the proposed regulations. The optimists believe that they are comprehensive and that nothing can escape their grip, while moderates believe that what is being achieved is more of a reform than a revolution, prompting financiers to take less risk, but does not force them to do so. As for the pessimists, they argue that the gap between good regulations and politics remains large, and that very few of these measures will be implemented soon. It remains that financial institutions are able to produce ‘pathogens' that can overcome the ‘antibiotics', i.e. the reforms.
