-- Even as financial markets gyrate and economies stagger, world leaders agreed to kick off the lengthy process of redrawing the rules of global finance at a Nov. 15 summit in Washington.
The meeting, hosted by President Bush and featuring heads of state from major advanced and developing economies, follows a strong push by French President Nicolas Sarkozy and British Prime Minister Gordon Brown.
Both have argued for major reforms to global banking regulations and to the key institutions of the postwar economic system to prevent a recurrence of the current financial tumult.
But the summit plans make dramatic changes unlikely anytime soon. Participants will discuss the origins of the current crisis, measures taken in response and "principles for reform," White House press secretary Dana Perino said Wednesday. Lower-level working groups will then fill in the blanks before more summits. "I don't believe that you'll have any details coming out of this meeting, in terms of things that everyone agrees to," she added.
Still, the roster of invitees alone highlights an important change: a shift of financial influence from traditional powers such as the United States to rising economies from Asia, the Middle East and Latin America. The drive to hold a financial summit originated in the G-8 club of wealthy nations, but the Washington meeting was expanded to include leaders from the Group of 20 nations, such as Brazil, China, Mexico, India, Saudi Arabia and South Korea.
"This will reset the head table for the planet, and that's a big deal," says Washington consultant David Rothkopf. Many of the summit participants will arrive in Washington convinced that the origins of the crisis lie in the light regulatory touch of U.S. capitalism. "The fracturing of the global financial system has been the result of irresponsible and often undisclosed lending that started in American subprime markets," Brown said earlier this week.
The British prime minister has called for an early-warning system to identify financial instability, greater cross-border supervision of giant financial firms and "a new international architecture for the global financial sector."
Globalization has reshaped banking like few other industries. Cross-border loans and other claims exploded from $684 billion at the end of 1977 to $19.8 trillion at the end of 2005. By March of this year, they rose an additional 70% to a staggering $33.7 trillion, according to the Bank of International Settlements in Basel, Switzerland.
That growth outpaced the ability of regulators and bankers to assess risk. Many U.S. and European banks have suffered enormous losses from complex securities linked to the collapsing U.S. housing market. Banking experts say new measures, perhaps including a global supervisory authority, are needed. "We need global solutions to a global problem," says Ken Thomas, a lecturer in finance at the Wharton School.
Bush is unlikely to endorse any call for a new global bank regulator. Instead, he called Saturday for preserving "free markets, free enterprise and free trade."
Even without a new global body, leaders must coordinate their policies so that risk-taking bankers can't shop around for the easiest place to do business. Next month's summit, says Donald Marron, CEO of private equity firm Lightyear Capital, will confront a key question: "Is the banking system set up the way it should be?"