G20 ministers not harsh enough – on themselves

London, the very source of the credit storm, is an entirely appropriate host for the G20 jamborees.

This weekend it was the finance ministers and central bankers who whizzed through the City and the Treasury. I wonder if any of their chauffeurs took a detour past the offices of AIG-FP in Mayfair, home to what was, on a per worker basis, the most lucrative financial enitity in the world, which was being regulated by basically nobody.

Or Lehman’s London office, or the European banks, and even the US banks that were operating both sides of their dollar balance sheets in London for tax and regulatory purposes.

The assorted ministers could be reminded of how little of this crisis they saw. Their approach this weekend seemed to recognise that they have a short window of opportunity to put rules in place to prevent more recklessness and hubris.

“I don’t think that’s possible,” joked the US treasury secretary when someone suggested that there had been more strident calls for a clampdown on bank bonuses in Europe than in the US.

He went on to say: “Compensation practices did contribute to the excess build-up in leverage we saw. They did tend to undermine the checks and balances that supervision is supposed to provide. And that’s why we’re not going to leave it to the market to fix this crisis.”

In many ways it is quite surreal to see a US treasury secretary even contemplating that he might interfere with a private sector pay deal.

And while the Anglo-American axis has kicked the idea of a cap on bonuses into the long grass (Geithner claimed at no point during the discussions had anyone raised the idea of an individual cap), there is a collection of ideas around clawbacks, paying bonuses out over a period of years, and public disclosure of high earners (one British bank is said to have 300 bankers who earn more than the average of the board) that are meant to rein in excessive pay.

These vague prescriptions for a new global financial system are meant to be fleshed out before the Pittsburgh G20 summit. To give some context, it took the best part of a decade to agree reforms to the Basel Accord on internationals rules for bank capital, and even then the US is yet to sign up to that.

I can’t help but feel that these finance ministers were not harsh enough on themselves. Some of their actions directly contributed to this. Light-touch regulation was an active policy choice.

The Canadians chose a different path. Huge capital requirements, a cap on leverage ratios or the size of a bank’s lending in relation to that capital, and strict enforcement. Canada’s banks were derided for being ‘boring’. The Canadian government has foregone banking profits over the past decade.

But guess how much public money was required to be injected into its financial system? Not one Canadian penny. And the Canadian finance minister says he believes the options for bank reform are “converging towards the Canadian model”. The G20 in Pittsburgh will determine whether this really happens. The big question, is why these options were ignored in Britain, America, and across Europe before the crisis hit. Few answers on that so far.