26 Feb 09 New Regulation: Implications for Capitalism II

On 23rd February Jean-Claude Trichet, President of the European Central Bank, gave a keynote presentation to the Committee of European Securities Regulators (CESR)[1]. Whilst this presentation was a clear signal of the shape of “regulation to come for the banking sector, there might be some important clues from this presentation, if we couple it with Federal Chancellor Merkel’s address to the World Economic Forum’s 2009 Davos meeting[2], as to the future shape of at least Europe’s view of “Capitalism II.

We could start by looking at Chancellor Merkel’s speech.

There are certain key phrases that can give us clues as to what the pillars of “Capitalism II might look like.

These are:

The crisis is as a result of irresponsible speculation …
Trust is an indispensable cornerstone of the economy.
… we need a credible means of limiting new debts once we have seen off this crisis.
We must not however leave it at these quick and decisive crisis measures. As politicians of great responsibility we are obligated to learn the lessons we need going forward we must shape the ‘post crisis’ world.

It is clear that an agenda is being assembled that will embrace more than a stiff dose of regulation for the banking sector. The final section of Chancellor Merkel’s speech was devoted to the introduction of five elements of central importance. The elements, which might form the pillars of “Capitalism II, are:

Element #1: Restrained Capitalism. The state is seen as the guardian of social and economic order. Whilst market forces must operate, there are clear limits, capitalism must act with social responsibility in mind. This is a clear middle course between total deregulated market forces capitalism and traditional socialist models.

Element #2: International Financial Stability. A globally coordinated regulatory system to stamp out less restrictive regulatory regimes. One approach is needed to stop organisations seeking out the most favourable regulatory regime.

Element #3: Global Openness. A clear drive against protectionist practices. As I have argued in earlier posts, this will be easier said than done if, and when, industrial contagion spreads.

Element #4: Sustainable Consumption. Care for the environment.

Element #5: Defeating global poverty. The responsibility that developed countries owe to the under-developed.

This paints a clear picture of what some would call “responsible capitalism.

Whilst Trichet’s address is aimed squarely at the financial system, there are some potential parallels, notably in the call for:

• incentives that encourage profitability in the medium to long term, not the short-term.
• risk minimisation and
• stress testing to ensure the long-term viability of the enterprise.

If we couple Merkel’s “Five Elements, especially Element #1, with Trichet’s themes we could see a situation where the new regulations, or at least expectations, extend beyond the banking and financial services sectors.

This is the main theme of this posting.

It may be unwise to assume that the focal point of new post crisis regulation will remain restricted to the banking and broader financial services sectors. If we do experience substantial industrial contagion in other words the collapse of substantial employers outside the banking and financial services sectors regulation or new disclosure requirements may extend to such substantial employers”.

What could we expect?

Well, the emerging menu may include:

• Restriction of short-term focused remuneration packages.

• Publication of long-term objectives.

• Demonstration of stress testing business plans.

• Extension of the responsibilities of non-executive directors to embrace resilience management.

• Measures to ensure employment stability.

• Formalised social responsibility objectives – that are to be reported against.

But that’s just after a couple of minutes reflection. No doubt you will have other ideas!

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References
[1] J. Trichet, Remarks on the future of European financial regulation and supervision, Feb. 2009.
[2] A. Merkel, Special Address, Jan. 2009.

Tags: capitalism, economic recession, recession, regulation