Banks should get back to the basics of lending to customers rather than pursuing the risky financial instruments that contributed to the crisis, top Russian and foreign bankers and officials told the St. Petersburg International Economic Forum over the weekend.
As the world reaches the “beginning of the middle of the end” of the crisis, as French Finance Minister Christine Lagarde put it, the world is contemplating a return to the Volcker Rule, which states that the investment and consumer branches of lenders should not be connected.
“The goal is to return the financial system back to where it should be, which is to support the real economy,” said Vikram Pandit, CEO of Citigroup, at the opening session
of the forum.
Participants at the event were in agreement that the financial system needed an overhaul to prevent a repeat of the collapse that came out of the US and continues to plague developed economies, particularly in Europe.
Some Russian banks were hit hard by the collapse on Moscow’s bourses in 2008, when the RTS Index lost around 80 per cent of its value, while those exposed to the household sector avoided most of the damage.
“Investment banks should be split and it is very clear that [investment banking] is higher risk,” said Oleg Vyugin, CEO of MDM Bank on the sidelines of the forum.
Vyugin said that his bank was already concentrating on retail and corporate loans and had separated this from its securities, adding that this should become a “global approach”.
The Group of 20 nations has started drafting new regulations and forum participants accepted that the financial system needed to take the blame for the crisis. However, they warned draconian legislation would stop banks generating the funds to lend to the real economy.
“There is clearly an element to which financial markets got out of control, but to push back and say it has just got to be lending and borrowing isn’t the right approach,” Andrew Cranston, a senior partner at KPMG, said on the sidelines of the forum.
The market is looking for global cooperation from finance ministries around the world to work together to coordinate regulations to avoid banks exploiting loopholes in the laws in one country.
“We should avoid regulatory arbitrage,” said Dominique Cerutti, the president of the NYSE Euronext bourse. “It is a call for regulators to cooperate and make sure we should harmonise and streamline the regulation around the world.”
Sberbank CEO German Gref said that even though the financial sector needed more regulation, he was more optimistic about growth in Russia’s banks over the next five years than in oil and gas.
“In the near future in Russia we will have growth and sometimes it will be fast, sometimes not so fast,” Gref said in a discussion about the future of the financial system.
Participants at the forum were not as positive, with 61 per cent of audience members saying in a poll that the country’s lenders were heading for “stagnation” over the next two to five years.
President Dmitry Medvedev also addressed regulation in his opening speech to the forum, saying that new laws would be developed this year as part of plans to turn Moscow into an international financial centre.
“We see our task as joining efforts with the world’s other large economies to improve the global financial system, reform international financial institutions and set new standards for regulating financial markets,” Medvedev said.
Vyugin, of MDM, said the new measures would be supported by the banks as they would help generate confidence, which would be crucial for both lenders and borrowers.
“It is a debt crisis but a lot of the current situation is because debt [is dependent on] confidence,” he said.