World leaders won't agree a single global approach on “too big to fail” banks but lenders will face a string of national remedies that will cut the odds of more massive taxpayer bailouts. Policymakers at the Group of 20 leading countries are discussing ways to reduce “moral hazard” or banks assuming they will be bailed out in a crisis. The debate has descended into two warring camps as in Gulliver's Travels, the 18th century satire, where one sect insisted on cracking open their soft boiled egg from the little end, while another chose the big end. Both sides agree on aims but banks and policymakers fear distortions in competition if no common method is found. Big enders got a boost last month when US President Barack Obama proposed his Volcker Rule to mandate structural changes to banks such as curbs on size and a ban on proprietary trading. Europe's little enders say everyone should stick to the G20 reform blueprint agreed last year that focuses on bumping up capital requirements, leaving bank structures intact. “In America the emphasis is on how do you minimize the impact of a crisis and resolve it, whilst in Europe it's how do you avoid a crisis in the first place,” said Avinash Persaud, chairman of Intelligence Capital. “These are very different approaches and it's not easy to see where the compromise is. You could well have the regions going in different directions,” said Persaud, who is also a member of the UN Commission of Experts on International Financial Reform. Pick and mix menu Some steps to tackle moral hazard are already being taken. The G20 agreed last year that by the end of 2010 the top 30 or so biggest banks in the world must write a living will for a quick and orderly wind down. This is seen as a permanent reminder they can be allowed to fail. Spain's Santander said this week it was first in the world to submit a death plan under the G20 reform. The G20 has also asked the Financial Stability Board to come up with further “too big to fail” proposals later this year but there is no consensus yet on how far they should go. The International Monetary Fund will also present the G20 with proposals in April for taxing banks in some way to pay for future bailouts. Canada has already let it be known it won't introduce such a levy and unless all G20 countries join in, a global tax could be unworkable. The likely upshot is that G20 countries will end up choosing from a broad menu of solutions to deal with too big to fail. It would be left to the FSB to make sure no country is engineering a competitive advantage for itself. The G20 should also give up on finding a common approach to “too big to fail” due to its fiscal nature, experts say. “As long as local taxpayers are footing the bill, it's going to be very hard to find global solutions that are unmatched with global tax capacity,” Persaud said. Proponents for structural changes already sense the opportunity for radical remedies may have passed as G20 members turn to ballooning public deficits and economic recovery is draining momentum for regulatory reform. “My fear would be, we have had this debate and we will set out possible alternative models for the structure of banking, but not very much will happen,” Bank of England Governor Mervyn King said this week. Resolution is key Big banks sense divisions among G20 countries as well and are lobbying hard against measures that would break them up. In Europe they have heavyweight backing from Britain, France and Germany who want to keep the universal bank model. “There is a very strong argument for being large enough to cope,” Douglas Flint, HSBC finance director told sceptical British lawmakers this week. Setting up speedy and effective bank resolution mechanisms and insisting on living wills are emerging as the best options for dealing with “too big to fail” on a national basis. “Resolution is a bit like fast and invasive surgery – you have got to get it right. Living wills won't be perfect but they will reduce uncertainty when things go wrong,” a central bank official in Europe said. The FSB is working on mechanism based on common principles to be followed in the resolution of national bank failures. “The resolution authority question is critical... it is the promise through which we are saying we will solve too big to fail,” said Gerald Corrigan, a Goldman Sachs managing director. “Achieving that is going to be very hard to do. We have never orchestrated and arranged an orderly wind down of very large institutions,” Corrigan said. But the “holy grail” of a global resolution mechanism will remain out of reach for the forseeable future due to differing national bankruptcy laws and lack of treaty, the central bank official said. Once national resolution systems are in place, policymakers can see how they could work together to deal with cross-border failures, the central banker said.
