Why No International Financial Regulation?

We will never stop the international banks at the international level. We need to curtail them at the national level. And we can't afford to wait for other countries; we have to do it for ourselves.
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

As we fast approach the unveiling of the Dodd-Corker financial reform proposals for the Senate, it is only fair and reasonable to ask: Does any of this really matter? To be sure, some parts of what the Senate Banking committee (and likely the full Senate) will consider are not inconsequential for relatively small players in the US market. For example, putting consumer protection inside the Fed -- which has an awful and embarrassing reputation in terms of protecting users of financial products -- would tell you a lot about where we are going.

But our big banks are global and nothing in the current legislation would really rein them in -- no wonder they and their allies sneer, in a nasty fashion, at Senator Dodd as a lame duck who "does not matter."

For example, the resolution authority/modified bankruptcy procedure under discussion would do nothing to make it easier to manage the failure of a financial institution with large cross-border assets and liabilities. For this, you would need a "cross-border resolution authority," determining who is in charge of winding up what -- and using which cash -- when a global bank fails.

To be sure, such a cross-border authority could be developed under the auspices of the G20, but there are not even baby steps in that direction. Why?

Part of the answer, of course, is that big cross-border banks know how to play governments off against each other -- dropping heavy hints that "international competitiveness" is at stake. These are empty threats -- if the US, the UK, and the eurozone cooperated on a resolution regime, this would get serious attention. If they went further and truly integrated their regulations -- including communications and practices (and inspections) across regulators/supervisors -- this could have major impact.

But national governments like to run their banks in their own way. In part, this may be sensible public policy -- who, after all, really wants the US to be in charge of deciding how a bank failure (in another country) is handled? (The US and the UK had a major row in the weeks after Lehman failed.) Even within the eurozone, there is a long standing refusal to specify in advance who is responsible for saving what part of which bank -- motivated in part by the desire to protect the bureaucratic turf of national central banks, which ceded power over monetary policy to the European Central Bank.

In part, no doubt, this also reflects varying degrees of "capture" in different places -- sometimes by bankers, but sometimes it's the politicians who do the capturing. As examples, see the work of Asim Khwaja and Atif Mian or Mara Faccio on how political connections really work in and around financial systems.

In any case, hoping that we can constrain banks through some form of international governmental cooperation is a complete illusion. The IMF and the WTO have no mandate on this issue. The Financial Stability Board is a paper tiger -- really just a talking shop between regulators (and the same goes for the Bank for International Settlements more generally).

The big global banks know all this -- and have known it for years. When Jerry Corrigan, former head of the NY Fed, no less, says Goldman did "nothing inappropriate" in arranging Greek debt swaps, he is in effect saying "catch us if you can".

You will never stop the international banks at the international level. You need to curtail them at the national level. And you can't afford to wait for other countries; you have to do it for your own country as a matter of pressing national priority.

Unfortunately, the Dodd-Corker proposals seem most unlikely to move us forward along this dimension.

Cross-posted from The Baseline Scenario.

Popular in the Community

Close

What's Hot