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In good old days we had 3-5-3 banking. Banking was simple, almost dull business. We took deposits at 3%, gave loans to client we knew at 5%, and went play golf at 3 PM. 3-5-3 simple banking. Today we employ math and physics Ph.Ds to create banking products. It is high time to go back to SIMPLICITY and to 3-5-3 banking. Therefore I see very little hope for decent progress, for decent reform, and for avoiding crisis-prone environment unless we properly eliminate the key factor behind future crises, which is excessive COMPLEXITY of financial instrument. To achieve simplicity we need LESS REGULATION, not more, and we need SMART GLOBAL REGULATION. G20 leaders so far failed to grasp this simple truth, and, unfortunately, seem to march in the opposite directions of more complex regulation.

Another issue that escaped G20 leaders attention is CONCENTRATION of financial activity. So far large banks took over other large banks that failed to survive on its own. This is dangerous as large concentration of power of financial institutions was another key reason behind the crisis, for example powerful banks were able to influence regulation, were able to agree on rules of the game, to mention the fourteen powerful families from the Superclass, David Rothkopf book. Without solving the issue of concentration and complexity we will continue to live in dangerous times.

I would suggest two issues to be put on the global agenda for Canada meeting – LESS COMPEXITY and LESS CONCENTRATION:

-          G20 is too many to take binding decisions, have you ever see a company managing board with 20 members that is effective. With respect to financial stability there should be a much smaller group that provides recommendations to leaders. A good starting point would be to form a Global Financial Products Forum, that would make recommendations on the path towards SIMPLICITY in the area of financial products. It’s members should be USA, UK, Eurozone, China, Japan and representative of the world of Islamic finance. The mandate should be delegated to people who understand the global financial landscape and have experience in central banking or financial regulation, for example: Frederick Mishkin (USA), Willem Buiter (UK), Otmar Issing (Eurozone) , Yi Gang (China), and equally well qualified senior figures from Japan and the world of Islamic finance

-          GPFP presents a typology of financial risk that should suffice the needs of real businesses around the world regarding financing and asset allocation.

-          Anything outside this scope is subject to small Tobin tax levied on every transaction above certain size. Revenues from this tax are used to fund the global regulatory body, which employs the best minds in the financial sector, such that their competencies and skill far outpace skill of those who create toxic financial instruments. Only when regulators have global reach and are very well paid, they will be able to act timely and effectively

-          Actions should be taken to break biggest financial institutions into smaller units, and in order to prevent the effect of “too interconnected to fall” we should design effective circuit breakers, to prevent domino effects.

We all want effective and safe financial markets. In the past decades effective meant less safe. It is high time to reverse this dangerous path. The only way to achieve this is less complexity and less concentration. We should return to 3-5-3 banking.

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- incentives should be created to avoid excessive risk taking

- strengthen regulatory regimes

- ensure that ALL participants and ALL products are regulated

- make regulation counter-cyclical

- deal with non-cooperative jurisdictions (including homes banks offering to secret accounts)

- reform Bretton Woods institutions, give greater voice to developing countries

- broaden the Financial Stability Forum membership

Adopted action plan, to be implemented by G20 finance ministers in cooperation with the IMF, important parts are below:

- improve accounting standards, create unified best practices

- create single, high quality global accounting standard

- by 31 March 2009 propose recommendations that mitigate pro-cyclicality of financial regulation

- all G20 members will undertake FSAP review

- definition of capital adequacy should be harmonized

- regulators should review rating agencies adoption of standards

- enhance OTC electronic markets for CDS contracts, force market participamts to support OTC market

- improve risk management and reporting, Basle Committee should develop new stress testing models

- standard setting bodies should react faster to financial innovation

- improve tax information exchange

- regulators should strengthen cross-border crisis management skills

- IMF should take a leading role in drawing lessons from the crisis

- IMF should get more funds

- IMF vote and quota should be changed to give emerging markets more influence

On other issues leaders stated their commitment to deal with other issues (energy security, global warming, food security, poverty, …)

Leaders stated that they will refrain from raising new barriers to investment and trading in goods and services.

The next G20 meeting will take place again by 30 April 2009.

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Now few comments of mine.

There is nothing new or unexpected in the statement. There is no new money committed, G20 just says that IMF, WB and other multilateral banks resources will be review and countries stand ready to increase them. To get the numbers right recall that IMF firing power is 250bn dollars, while developed countries have already allocated some 9 trillion dollars to crisis fighting (governments 7tr – including guarantees, as estimated by the Bank of England in recent financial stability report ) and 2tr in central bank lending against dodgy collateral). In other words there are a lot of words and no meat in the statement, so markets may be disappointed, but lets see what will be the opening in Asia on Monday.

The statement presents worries that emerging markets may be shut off from foreign funding. It is worth remembering that Robert Lucas Jr. has already identified a puzzle (called Lucas puzzle after him) that capital flow from emerging markets to developed markets, against the economic theory. Since Lucas paper this trend intensified massively. So the real problem does not lie with the US and European banks and funds that would stop lending to emerging markets and buying their shares, the real problem is that emerging markets financial institutions should stop buying US debt and should
invest much more in the emerging markets as a group. So the top priority should be creating deep and liquid markets in Asia and in the Gulf, that would provide excellent market infrastructure, top corporate governance standards and legal protection. Statement is silent on this aspect of solving the crisis.

Finally, I am of the opinion, that if you have something very important to say, and the whole financial world is waiting, you should say it on one page in a plain language. When business people adopt the action plan, the give precise framework and set performance measures, so that you know whether the plan implementation goes well. When politicians create action plan, it is in a fuzzy language over a hazy horizon. Then they can go home and every leader can interpret the statement in his/her homeland in line with local political needs. I am not sure we have time for this standard political communication in crisis times.

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