The leaders of the G20 countries gathered in Pittsburgh on 24 and 25 September 2009 to discuss a range of economic issues. These included co-ordinated action to ensure the world economy maintained its fragile recovery; reforming the IMF; agreeing action on bank regulation and the limiting of bankers’ bonuses.
The following is a selection of podcasts and videos looking at various aspects of the summit and its outcomes. The first one, to set the scene, is a webcast from the IMF looking at the state of the world economy and the role of macroeconomic policy and banking regulation. There are also some articles looking at the achievements of the summit. (See here for G20 draft communiqué)
World Economic Outlook, September 2009 (video) IMF Webcast (22/9/09)
G20: Who will feel the pain and when? (video) BBC Newsnight (25/9/09)
G20 leaders meet in Pittsburgh BBC Today Programme (25/9/09)
‘Little change’ in bank regulation BBC Today Programme (25/9/09)
World Bank’s Zoellick on G20 Summit (video) CNBC News (25/9/09)
G20 ‘was a successful meeting’ BBC Today Programme (26/9/09)
Obama on G20 plans for financial reforms (video) BBC News (25/9/09)
Greater role for emerging powers BBC News, Amartya Sen (25/9/09)
Preventing Another Global Crisis (video) CBS News (25/9/09)
Obama hails progress at G20 (video) Reuters (26/9/09)
World map of deficits and stimulus spending
The cost of the financial meltdown: Deficits and spending BBC News
Articles:
G20: Banks to be forced to double capital levels Telegraph (25/9/09)
Will tough new G20 measures work? BBC News (26/9/09)
Analyst View: G20 ends reign of G7 in Pittsburgh Reuters (25/9/09)
Leaders bury differences over bonuses to agree standards FInancial Times (26/9/09)
Same tune, different fiscal instrument on bank bonuses Times Online (25/9/09)
G20: History and fudge Peston’s Picks, BBC News (25/9/09)
What the G20 said on bonuses (and why it didn’t say much at all) eFinancialCareers (27/9/09)
Hamish McRae: G20 communiqué signals transfer of power to the emerging world Independent on Sunday (27/9/09)
The G20 fantasy Guardian (27/9/09)
Questions
- Explain the issues faced by the G20 countries.
- To what extent is trying to reach international agreement on co-ordinated action a prisoner’s dilemma game? Is it, nevertheless, a positive sum game?
- What was agreed at Pittsburgh and to what extent will it lead to action as opposed to being mere rhetoric?
- The G8 is effectively dead, having being replaced by the G20, plus Spain, The Netherlands and various international bodies, such as the IMF. What are the advantages and disadvantages of this move?
The blame for the global economic crisis has been placed on many different people, but one area that has been severely criticised for the extent of the financial crisis is banking and financial regulation (or a lack thereof). One thing that has been repeated is that we must learn from our mistakes and therefore tighten financial regulation on a global scale. The Institute for Public Policy Research (IPPR) says the ‘rapid return to the City’s bonus culture shows that real reform has been “very limited”’. France in particular is arguing for tighter financial regulation, including curbing bankers’ bonuses to avoid a repeat of last year’s meltdown. However, it is meeting resistance from the UK and USA. Indeed, some banks appear to have extended their bonus culture.
As the banking sector slowly begins to recover, there is concern that few changes have been made to ensure that there is no repeat of the recent crisis. Banks have been warned that they should not resume taking risks, as they did before, as future bailouts by the government (and hence the taxpayer) will not keep happening. The European Union has now unveiled plans for new ‘super-regulators’, but only time will tell whether they will be a success.
EU unveils new ‘super-regulators’ BBC News (23/9/09)
EU proposes new Financial-Market supervision system The Wall Street Journal, Adam Cohen and Charles Forelle (24/9/09)
FSA head launches fresh attack on ‘swollen’ system ShareCast (24/9/09)
Bank crisis lessons ‘not learned’ BBC News (15/9/09)
US, UK resisting French drive for regulation AFP (22/9/09)
European System of Financial Supervisors (ESFS): Frequently Asked Questions Mondovisione (23/9/09)
Tighter grip on economy needed BBC News (13/9/09)
Turner warns against regulation overkill Money Marketing (23/9/09)
EU calls for European Banking, Securities Regulators Bloomberg (24/9/09)
EU financial watchdog to rely on moral authority The Associated Press (23/9/09)
Obama issues warning to bankers (including video) BBC News (14/9/09)
Questions
- What are the advantages and disadvantages of tighter regulation of the financial sector for (a) the UK and (b) the global economy? What forms should such regulation take?
- What are the arguments for and against imposing a statutory capital adequacy ratio on banks that is substantially higher than the ratios with which banks have been operating in recent years?
- In what ways was a lack of financial regulation responsible for the financial crisis?
- Why is the continuation and possibly growth of the bonus culture a potentially dangerous issue for any future crisis?
- The articles talk about ‘lessons being learned’. What lessons are they referring to?
- The financial crisis has affected everyone in some way. What has been the impact on taxpayers?
Is the power supply industry a cartel? Are the energy companies exploiting a position of market dominance to increase profits at the expense of consumers? At first sight, it would certainly seem so. Despite falling wholesale prices for gas and electricity, the six main power suppliers have not reduced prices to their customers. The result has been a substantial rise in profits. Over the past three years, the average annual gross profit for supplying each dual-fuel customer has been £110. The figure has now risen to £170, a rise of 55%. This is likely to rise further in the short term with further reductions in wholesale energy prices over the next few weeks.
But despite this large increase in profits, the power companies are considering increasing prices this coming winter if wholesale energy prices start to rise again, even though the expected wholesale price rise would still leave them with a gross profit of £140 per dual-fuel customer.
Ofgem, the gas and electricity industry regulator, wrote to the six main companies asking them to explain their pricing position. You can read Ofgem’s report from the link below. In it, Ofgem argues that there is scope for the companies to cut their prices. But Ofgem no longer has the power to cap prices: in 2002 the RPI-X system of price cap regulation was abandoned, since it was felt that there was enough competition between suppliers not to warrant price regulation.The articles below consider the question of whether the companies are justified in their pricing policy or whether they are exploiting their market power to make excessive profits.
No energy cuts despite huge profits (video) Channel 4 News (18/9/09)
Energy bills may rise despite wholesale price drop Times Online (19/9/09)
Where is the will to power? Times Online (19/9/09)
Energy bills set to rise further, companies warn Guardian (18/9/09)
Energy bills ‘unlikely to fall’ BBC News (18/9/09)
Bills face a power surge (Douglas Fraser’s Ledger) BBC News (18/9/09)
An Electricity and Gas Price Cartel? Why Ofgem Can’t Tell iStockAnalyst (17/9/09)
Evidence from Ofgem:
Ofgem’s letter to the six main suppliers and their responses to Ofgem can be read here
Ofgem’s findings can be read in Quarterly Wholesale / Retail Price Report – August 2009
Ofgem Factsheet: Household energy bills explained
Questions
- Assess the justification by the power companies for not reducing the price of gas and electricity to their customers.
- Explain what is meant by ‘hedging’ in the context of the purchase of gas and electricity.
- The power suppliers are an oligopoly. If there is collusion between them, what form does it take? Why is it very hard to find evidence of collusion?
The large bonuses received by bankers, often amounting to more than a million pounds, have been contentious for many years. With the banking crisis and subsequent recession, and with both public and government outrage at the size of the bonuses, many thought that the days of such bonuses were over. But such is not the case. “There has been public disquiet that leading banks – which have been seen as a major cause of the financial crisis – have been receiving taxpayer funds, but are not prepared to change their traditional culture of awarding big bonuses to key staff.”
The following articles look at what has been happening to senior bankers’ remuneration in recent months. But what are the market conditions that allow such rewards to continue? Are they a reflection of the marginal productivity of bankers or of their market power, or what?
RBS to keep paying bonuses despite 1bn first-half loss Telegraph (7/8/09)
Lloyds chief plans bonuses for ‘spectacular job’ in making £4bn loss Telegraph (6/8/09)
CS toxic bonuses are up 17%, but gains can’t be realised for four years eFinancial Careers (7/8/09)
Banks: Look, don’t touch Guardian (8/8/09)
Analysis: The plan’s the thing Times Online (7/8/09)
Cutting our bonuses would hit the taxpayer, says RBS Citywire (7/8/09)
France targets bankers’ bonuses BBC News (7/8/09)
Sarkozy weighs into debate over banker bonuses after BNP Paribas compensation sparks anger Los Angeles Times (7/8/09)
Knotting the purse-strings The Economist (6/8/09)
Pay and politics The Economist (6/8/09)
Questions
- Explain why many senior bankers have continued to receive huge bonuses. To what extent is oligopoly theory relevant to your explanation?
- To what extent do the size of the bonuses reflect senior bankers’ contributions to (a) the productivity and (b) the profits of their bank?
- If bankers are to be paid bonuses, what is the best form for these bonuses to take? Consider the incentive effects in your answer.
- Should bankers’ bonuses be regulated and, if so, what criteria should regulators use for determining the acceptable size of bonuses?
On July 8 the UK government published its long-awaited White Paper on reform of the system of banking regulation. Several commentators had called for the abolition of the ‘tripartite’ system of regulation, whereby responsibility for ensuring the stability and security of the banking system is shared between the Financial Services Authority (FSA), the Bank of England and the Treasury. Some have advocated a considerable strengthening of the role of the Bank of England and even abolishing the FSA. What is generally agreed is that there needs to be ‘macro-prudential’ regulation that looks at the whole banking system and at questions of systemic risk and not just at individual banks. Several of the articles below debate this issue.
The government’s White Paper proposes keeping the tripartite system but also strengthening various aspects of regulation. Amongst other things, it proposes giving the FSA powers to ‘penalise banks if their pay policies create unnecessary risks and are not focused on the long-term strength of their institutions’. It also proposes setting up a ‘new Council for Financial Stability – made up of the FSA, the Bank of England and the Treasury – to meet regularly and report on the systemic risks to financial stability’. Banks would also be required to increase their capital adequacy ratios. The first two articles below give an outline of the proposals. The detailed proposals are contained in the third link, to the Treasury site.
Chancellor moves to rein in ‘risky’ banks Independent (9/7/09)
Banks to face tougher regulation BBC News (8/7/09)
Reforming financial markets HM Treasury (8/7/09)
Treasury sees devil in the detail Financial Times (7/7/09)
How to police the banking system Independent (8/7/09)
City regulation: a quick guide Telegraph (8/7/09)
Treasury White Paper: what it means for the financial services industry Telegraph (8/7/09)
Key issues: Financial regulation BBC News (8/7/09)
Alistair Darling accuses banks of ‘kamikaze’ attitude to loans Telegraph (5/7/09)
HSBC boss on banking reform BBC News video (3/7/09)
Bankers ‘want to be proud of what they do’ BBC Today Programme, Radio 4 (7/7/09)
Divisions on display at Mansion House BBC Newsnight video (18/6/09)
Who should supervise the banks? BBC Newsnight video (18/6/09)
Governor wants more bank powers BBC News video (17/6/09)
King puts spotlight on banks too big to fail Times Online (21/6/09)
Mervyn King: Banks cannot be too big to fail Edmund Conway blog, Telegraph (17/6/09)
The City doesn’t need any more rules Telegraph (6/7/09)
Treasury admits ‘intellectual failure’ behind credit crisis Telegraph (8/7/09)
Bankers to face draconian pay veto Times Online (8/7/09)
Questions
- What do you understand by macro-prudential regulation? What would be the difficulties of applying regulation at this level?
- Why may liquidity ratios and capital adequacy ratios that are deemed appropriate by individual banks be inappropriate for the banking system as a whole?
- If banks are too big to fail, why does this create a moral hazard?
- Examine the case for splitting universal banks into retail banks and investment banks.
- Examine the arguments for and against regulating the level and nature of remuneration of senior bank executives.