US banks see increased call for action

Two separate reports from the US reveal that banks on Wall Street are set for something of an overhaul.

The first report, led by regulators including the Federal Reserve, highlight an intensified effort to gather intelligence on banks' trading positions; the second, as reported in the Financial Times, reveals that Tim Geithner, US Secretary of the Treasury, is to urge a key Congressional committee to push ahead with his plan for financial regulatory reform.

In the case of Geithner, the Treasury secretary is set to take his reform message to the G20 summit in Pittsburgh, where he will argue that global economic imbalances need to be tackled if we are to rebuild the financial services industry. It is believed that Geithner will stress the need for a new enhanced oversight role for the International Monetary Fund (IMF).

Meanwhile, Wall Street executives have revealed that regulators - led by the Federal Reserve - have, in recent weeks, been asking banks to provide a breakdown of their balance sheets. And according to reports from several Wall Street giants, particular attention has been being paid to banks' trading books.

A move of such calibre has really come to the fore following moves by G20 leaders already reporting that bankers' pay will be under intense scrutiny at this week's meeting in Pittsburgh.

According to the Fed, they wanted to know what proportion of a bank's balance sheet was held in more liquid positions, compared to how much was being held in derivatives or other trading positions whose, they say, profitability might not be known for years to come.

The balance-sheet investigation comes following Fed plans for new rules, which could enable a dramatic overhaul of the tradition pay models for bankers. According to some reports, the Feds are even considering a restructuring that would see bonuses based on paper gains at the end of each year, before it is known whether they have made a loss or a profit in cash terms.

It is largely believed that current pay structures were a huge contributing factor to the crisis, by giving traders incentives to focus on high-risk, short-term strategies; it is hoped that a restructuring of bankers' bonus would play a massive part in preventing future, potential crises.

For Geithner, a similar conundrum is in place: “To succeed in laying stronger foundations for growth, the leading economies of the 21st century have to be central to the solution,” he is quoted as saying yesterday in the Financial Times.

“These challenges to the world economy were man-made; they were not natural disasters,” he added. “Having an independent assessment will be central to this process.”

23/09/09

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