Davos Summit 2010: Banks must get real on profits, says WEF report

Annual meeting to focus on 'rebuilding the global financial architecture'
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The Independent Online

Gathering in a more sober mood than was often the case during the boom years, organisers of the World Economic Forum in the Swiss town of Davos will attempt to focus the attention of the 2,500 or so leading bankers, business people and economists here on the slogan for this year's gathering, the 40th since 1971: "Rethink, redesign, rebuild the global financial architecture" – or, in layman's terms, "fixing the banks".

The urgency and importance of the task was highlighted in a special report published on the eve of the conference. In it the WEF, in collaboration with the management consultancy Oliver Wyman, warned that the banking industry will have to adjust to lower levels of profitability than prevailed before the credit crunch. The report's authors also cautioned that the financial community needs to become more "realistic" about remuneration in the years ahead, reflecting widespread public and political disquiet about lavish bonuses.

The report said: "A multitude of factors point to lower run-rate industry profitability in the near and medium term. Financial institutions will need to rethink their business and human capital models in order to adjust and differentiate as a result... they will need to promote and enforce positive values such as integrity and responsibility."

A further working paper from the WEF asks governments to exercise commercial rather than political judgements when they come to sell off their substantial equity stakes in formerly private banks acquired during the financial crisis. "Taxpayers will benefit most if governments put shareholder responsibility ahead of political considerations when it comes to managing their equity stakes in financial institutions," it said.

Across the world, more than $700bn (£434bn) of taxpayers' money has been invested in financial institutions, including The Royal Bank of Scotland and Lloyds Banking Group in the UK, Hypo Real Estate in Germany and AIG, Freddie Mac and others in the US. The WEF added that "the wrong choices – in policy objectives, management strategy, or emphasis in execution – could cost taxpayers billions of dollars and have long-term implications for the stability of the global financial architecture."

Still more controversially, the report's authors say that state-owned institutions have little spur to competitiveness, distort the market for banking services and exacerbate the "too big to fail" problem by being so obviously backed by taxpayer guarantees. Despite calls from many politicians and small business organisations for state-owned banks to be made to expand their loan books, the report states that ministerial interventions should be limited to the board membership and other governance matters.

Further attention today will centre on contributions from Bob Diamond, the president of Barclays, and Lord Turner, the chairman of the Financial Services Authority, during sessions on preventing new financial crises and asset bubbles.

However, for most of the attendees in Davos, the appearance of the former US president Bill Clinton, the UN Special Envoy to Haiti, will be one of the highlights of this year's event, albeit in sombre circumstances. Mr Clinton will launch an appeal to some of the planet's richest individuals and most powerful corporations to contribute more to the rebuilding of what was already an impoverished nation before the devastating earthquake earlier this month.

*The police commander in charge of security at the World Economic Forum in Switzerland was found dead yesterday, local authorities said, adding that his death appeared to be suicide.

Markus Reinhardt, the head of police in the Swiss canton of Graubunden, was found dead in his hotel in Davos, police said in a statement. "All indications point to a suicide," the statement said.

Mr Reinhardt, 61, had headed the canton's police force since 1984. Police captain Marcus Suter will take over the security operation of the five-day assembly.