The real G20 breakthrough

Just out of interest, which do you think is more important: limiting how much bankers are paid, or strengthening banks so that they are better able to absorb losses on loans and investments and less likely to run out of cash when creditors demand their money back?

You may think this is a false dichotomy. And to an extent you are right.

Because the so-called bonus culture within banks contributed to the crazy risks they took in the bubble years leading up to the crunch of 2007, and was therefore a contributor to the worst financial and economic crisis the world has experienced since the 1930s.

Even so, when it comes to sleeping easier at night, most of us are probably less concerned about what our bankers are being paid and are more concerned to know that they have enough capital and liquidity or cash to withstand whatever tremors and storms lurk ahead.

Which is why the media coverage of this weekend's meeting of finance ministers from the G20 biggest economies was unbalanced.

It focussed almost exclusively on the allegedly "sexy" and "easy-to-grasp" agreement that bankers' pay must be reconnected to the fundamental performance of banks, which would imply the end of get-rich-quick.

Or to put it another way, the stories - and the posturing of some finance ministers - tried to satisfy the perceived desire of most of us to bash bankers for the havoc they've wreaked.

But arguably the ministers agreed something else more important, largely ignored by the non-specialist media because it is thought to be too dull and hard - which was to strengthen banks' financial foundations and to make it more expensive for banks that are big and complex to carry on their reckless pursuit of speculative profits.

That may not titillate you, but it is far from boring, in that there are few more important questions for any of us than whether our money is safe in the bank.

And our confidence that our banks are secure will only return when the banks demonstrate that they are managing themselves prudently - which is a matter of both the incentives they offer to staff and their financial strength.

As I said in my recent Richard Dunn lecture, we have been badly let down by the priesthood of regulators, central bankers and finance ministers - to whom we unknowingly delegated all authority to devise rules to maintain the stability of our banks and the financial system.

We would be foolish to switch off our brains and simply trust them to get it right this time round. But, of course, democratic engagement in this process requires us to take an interest.

So just in case you are up for that, these are just some of the issues that are hugely important and remain unresolved:

• should the capital requirements imposed on retail and investment banking conglomerates such as Barclays, Citigroup and UBS be so punitive as to force those conglomerates to break themselves up into smaller, less complex units?
• what tools should central bankers be given to deter banks in general from lending too much in boom periods?
• should there be a strict and relatively low limit on banks' gross lending investing relative to their capital resources, what is known as their "leverage", as a safeguard against them gaming more sophisticated rules?
• should we move quickly to force banks to increase their holdings of capital and cash, which brings the danger that they will lend too little while the economy is vulnerable?
• should there be a cap on what banks can pay out in bonuses or variable remuneration relative to their profits?

We are still probably months away from resolution of these questions, that will determine not only the robustness of the infrastructure of the global economy but also the prosperity of countries like the UK and US, where the growth in recent years has been hugely dependent on the availability of cheap credit and where the financial sectors have provided a relatively high proportion of economic growth and tax revenues.

And, by the way, you can hear me discussing what is at stake with Adair Turner, chairman of the Financial Services Authority, in this week's edition of Peston and the Money Men (on air now and on iPlayer).

Which brings us to one of the great challenges for anyone wishing to be a dispassionate observer - and that is to screen out the nationalistic noise emanating from individual finance ministers.

On the occasion of this latest G20 confab, there were clear if perhaps irrational dividing lines between the British and Americans on the one hand and the French and Germans on the other.

The French and Germans in effect accused the UK and US finance ministers of being too soft on bankers' pay. But this was perhaps a neat distraction from their own sensitivity, which is whether the big French and German banks have enough capital.

Just before the summit, Tim Geithner - the US treasury secretary - issued a statement saying that the priority was for banks to raise more capital and for a ceiling to be imposed on how much any bank can lend as a multiple of its capital (the leverage multiple I mentioned earlier).

In a way, this was easy for him to say. Because, in general, US banks have lent between 10 and 13 times their core equity capital, whereas French and German banks' equivalent lending multiples are between 30 and 70.

On that analysis, French and German banks would need to raise a ton of expensive new capital - even though they have proved themselves to be far less reckless in their lending than their US and UK counterparts in recent years.

In fact, over the past few years, French and German banks have been more leveraged, to use the ghastly jargon, than the hedge funds which their politicians profess to despise.

Which rather implies that there will need to be cost and sacrifice for them and their banks, as well as for those of the UK and the US, in mending global finance.