European policymakers should come up with a sweeping solution to stop the spreading of the debt crisis sooner rather than later, to restore confidence to markets, participants in a panel organized by CNBC at the Saint Petersburg International Economic Forum said on Thursday.
Ministers for the 17 euro zone countries will look on Friday at ways to make the creation of a banking union a reality for the single currency area, but market jitters over the lack of decisive action were evident when yields for 5-year Spanish bonds hit a 15-year high in an auction earlier in the day.
""Our fear is that the markets move faster than policymakers," Vikram Pandit, chief executive officer at Citigroup, said.
"Every step matters, every step is important but every step buys us time. The bigger solution requires dealing with the sovereigndebten masse," Pandit added.
Tharman Shanmugaratnam, Deputy Prime Minister, Minister for Finance and Minister for Manpower in Singapore, said the absence of cross-border investment in sovereign debt shows "a breakdown in markets."
"This is the most complicated challenge that we faced in over 50 years," Shanmugaratnam added.
Over-Regulating the Banks?
Since the subprime crisishit in 2007, the world went through what some commentators said was the worst recession since the 1930s and banks have been criticized for not being sufficiently transparent when it came to financial innovation.
Meanwhile governments were accused of being "asleep at the wheel" in regulating the financial institutions.
Jim O’Neill, Chairman at Goldman Sachs Asset Management, told the panel that too much regulation could hurt the banks and in turn cause more economic problems than it solves.
Sri Mulyani Indrawati, Managing Director at the World Bank, said banks cannot be treated like any other industry because of the danger that the ones that are "too big to fail" could drag the whole economy down with them because of the importance they have in the banking system.
Governments have already tightened rules for banks and this trend is likely to continue as policymakers try to ensure another crisis like the subprime one cannot be repeated.
"There is an immediate consequence of this tightening," Sri Mulyani Indrawati said. "That [consequence] is going to be a very tough environment for banks, because they have to regain the trust."
Pandit said regulators should give time to reforms such as changes to the Basel rules on capital to work before introducing more regulation.
He admitted that "trust has been broken" and said that rebuilding it will take banks focusing back on serving their clients but also more transparency on the part of financial institutions.
However, there are many who say the whole culture in the banking system needs to be changed, with Shanmugaratnam calling for more accountability.
"We've got to find a way of bringing individual and collective responsibility back into the banking system," he told the CNBC panel.