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Home The Feuilleton of MilSan and MikWag LaGarde en Garde: Bank Diet à la Française

LaGarde en Garde: Bank Diet à la Française

French women don’t get fat. They simply won’t permit it to happen, and they look disparagingly on those who do. So it is no surprise that Christine Lagarde, French minister of economic affairs, has been reproaching the international banking system for its corpulence and overindulgence. She is calling on the banks to repent their financial gluttony, to show some self-control. “Nevermore,” says Lagarde to those banks that have lived too long in a state of morbid obesity. Her French Bank Diet prescribes a regimen that will make banks healthier and allow them to build financial muscle. In an August interview in Le Monde, she declared, “I want the French banks to exercise absolute discipline, and I’ll have zero tolerance for excesses.” At the Pittsburgh G-20 Summit, Madame Lagarde will expand her campaign internationally, advancing an agenda that would require all banks to go on the French Bank Diet.

Ms. Lagarde is proposing an absolute cap on bonuses and more oversight over bonus allocations, which should be phased in over several years. She calls them “anti-abuse, anti-excess rules.” This regulation, argue the French, would allow withholding a portion of bankers’ bonus pay if collateralized debt obligations are unlikely to be met, thus creating a healthier risk-reward balance in banker chow.

France’s recipe for slenderizing the banks, although promising sustainable results, will most likely fail to find sufficient support at the Pittsburgh Summit. The September 2009 meeting in London gathered G-20 finance ministers and central bankers to prepare for the Summit in Pittsburgh and discuss implications of the French banking reform plan. This meeting revealed, according to Le Monde, that the G-20 member states, even though recognizing the importance of regulating bonuses, are not that crazy about implementing the French prescriptions. Financial gurus say that the measures are too specific, entail too much interference from regulating authorities and require close oversight, which would be hard to enforce at the international level. The Financial Times, as well as Le Figaro, talk about American and British reluctance to religiously follow the French. They fear that French guidelines will make banks anorexic.

The Americans in particular have been outspoken against the French Bank Diet. “The shareholders, not the central bankers, should decide on the pay,” say several American sources. The laissez-faire alternative advocated by the Americans surprises the French. And their reaction is understandable given the staggering consequences of the bail-out assistance extended to U.S. financial companies and the obvious mismanagement, carelessness and blunt ignorance that drove the United States, and consequently the entire world, into the financial crisis.

The French government is advocating a cure for the causes, not the consequences, of the global financial crisis. According to Lagarde, this crisis happened not because capital-asset ratios were wrong or capital requirements were set too low, as the Americans would like to believe, but because there was no mechanism to prevent financial institutions from vacationing at spa resorts and buying jets and other luxuries with dollars earned easily by unjustified risk.

Despite the seeming ubiquitous skepticism in the G-20 about strict bonus regulation, Christine Lagarde is slowly advancing her argument. In an interview following the London meeting, she told Le Figaro that there had been progress on bonuses. “Several weeks ago,” said Lagarde, “the use of the word ‘limitation’ in relation to bonuses was totally unforeseen and inconceivable.”  She considers it a success that G-20 finance ministers and central bankers have taken the French proposal under consideration.

Yet the G-20 communiqué issued after the London meeting did not contain any specifics about bonus control. Finance ministers and central bankers decided to release a separate G-20 Statement on Banking. This statement stresses the need for delivering a framework on corporate governance and compensation practices. It remains unclear, however, how exactly the G-20 might oversee, supervise and arrest the meretricious practices of banks. Avoiding the details, they left the devil out.

In Pittsburgh, Madame Lagarde will continue to solicit G-20 members to purge unjustified short-term risk and, as quoted in Bloomberg, “reprehensible” practices from the international banking system. She will once again counter U.S. Treasury Secretary Timothy Geithner with appeals to oversee bonus calculations, stagger bonuses over several years and penalize banks that do not meet the requirements.

It isn't like Madame Lagarde is calling on the bankers to renounce their worldly possessions, to live below the poverty line, to move to sub-Saharan Africa, Bangladesh, or Detroit. She isn't calling for a drought or a plague on their houses. She is simply trying to help them to not gorge themselves to death once again.

The French Bank Diet prescribes moderation, rules and consistency. It promises to mitigate future crises, prevent short-term risk and punish those who refuse to abide by the rules.

The Pittsburgh Summit will reveal who is willing to get into financial shape à la française.