By Lisa Jucca
DAVOS, Switzerland (Reuters) - Two years ago anyone uttering the words "state" and "regulation" in the same sentence would have been sneered at in high-powered banking circles gathered by the ski slopes of Davos.
Now, more than 18 months into the biggest financial upheaval in the last eighty years, those bank executives that still have jobs are preparing to swallow large doses of regulatory medicine to help cure a crisis they are accused of causing.
With bank lending still frozen, the world sliding into recession and more than 300,000 financial jobs already gone, policymakers are replacing bankers in the driving seat at this year's World Economic Forum (WEF) to discuss short- and long-term solutions to the sector's woes.
"Two years ago nobody could see the problems and the risks," said Marc Weil, head of EMEA Financial Services at consultancy firm Oliver Wyman, which is publishing a report on the state of the global financial services industry this week.
"It is clear now that the financial services industry is like no others and anyone that poses systemic risks needs tighter regulation."
This may include greater balance sheet transparency, higher bank capital requirements and a co-ordinated effort to bring banks back toward what they used to know best: lending.
"But it is inappropriate to say we went from the Wild West of capitalism to something resembling the Soviet Union. We never had a complete free market," Weil added.
The WEF may enable leaders such as British Prime Minister Gordon Brown, European Central Bank President Jean-Claude Trichet and EU Internal Market Commissioner Charlie McCreevy to swap notes on financial regulation ahead of key Group of Seven and Group of 20 meetings.
"We see an expanded room for regulatory oversight. There may be additional activities that have not fallen under the scope of regulators. It may be more a case of regulating the activity rather than who someone is," said Bernd Jan Sikken, co-author of a WEF report on the future of the global financial sector.
Other financial leaders attending include Hu Xiaolian, Deputy Governor of China's central bank, and Japanese Finance Minister Shoichi Nakagawa and International Monetary Fund's First Deputy Managing Director John Lipsky.
Notably missing will be company executives, regulators and policymakers from the United States, where newly elected President Barack Obama is pushing through a giant $835 stimulus package to jump-start the economy.
PAST MISTAKES
The WEF will also offer decision-makers an opportunity to learn lessons from past mistakes.
One panel is set to analyze the 36 hours that followed the sudden collapse of U.S. investment bank Lehman Brothers in September, when more than $600 billion was burned during an unprecedented downward spiral on global markets.
Persistent instability in financial markets since the first round of state interventions that followed Lehman's collapse showed that pumping cash into banks, arranging forced mergers or even outright nationalizations were not enough to mend the troubled banking sector.
After a second round of cash injections, some countries are mulling the possibility of creating "bad banks" to relieve banks of illiquid assets and allow them to concentrate on lending.
Switzerland led the way by in October, with its central bank agreeing to take on up to $60 billion of bad assets from flagship bank UBS, which had come to the brink of collapse.
Regulation may also come in the form of requesting banks to hold more capital against their assets and a relaxation of some accounting rules that helped exacerbate the crisis.
"We will probably face more regulatory oversight for the big banks. Smaller institutions will have more flexibility in their activities but will have a growth constraint," Sikken said.
But despite encouraging signs from global forums such as the G20 or the IMF, the danger of uncoordinated efforts and a knee-jerk regulatory response remain, experts say.
Brown, who led Britain's aggressive response to the crisis, warned on Monday against a retreat in financial protectionism.
"We need to ensure we do not exercise a new form of financial mercantilism of retreat into domestic lending and domestic financial markets," he said.
For full coverage, blogs and TV from Davos go to http:/www.reuters.com/davos
(Editing by Erica Billingham)
