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Home > Blogs > Anthony Harrington > G20 in June—The subtext: You go your way and I’ll go mine…

G20 in June—The subtext: You go your way and I’ll go mine…

G20 Summit 2010 | G20 in June—The subtext: You go your way and I’ll go mine… Anthony Harrington

Everyone knows that you can’t impose a stringent new regulatory framework for the banks on a piecemeal, country-by-country basis. That would simply present the banks with endless opportunities for regulatory arbitrage, shifting operations to countries with the lightest-touch regulation. However, there are some near insuperable problems emerging in achieving unified regulation.

First, Europe has a multispeed economy, and there are serious dangers to whatever fragile growth currently exists if all member states were to force their banks to increase their capital reserves before growth was more firmly entrenched. Since different countries are growing (or failing to grow) at different speeds, Europe has little option but to go for a phased approach—which is precisely what the G20 has opted for, following its meeting in June. There may or may not be unity at the end of such a protracted phase in period (although one suspects not), but in the meantime banks will be free to play games.

However, there is a second, and perhaps even more significant source of disunity at a global level. The US has one view of regulation and Europe has another, and while both have their merits, they are most definitely not the same thing. Avinash Persaud, formerly the Chair of the UN’s “Stiglitz Commission” on financial reform describes the differences between Europe and the US thus:

“The emphasis in Europe has been on how to regulate financial markets to moderate future crises. The argument runs that credit mistakes are made during the boom, not during the crash, so better regulation and monetary policy during the boom years could limit the scale of any bust. They add that in a crash, moreover, markets are not very discerning, and it is hard to strike a balance between those to be saved and those to be thrown to the wolves. Europeans now focus therefore on how to limit financial crashes by introducing new macro-prudential regulations, for instance counter-cyclical charges levied by systemic risk committees, and by creating minimum liquidity buffers.

“The emphasis across the Atlantic has been on finding market-friendly ways to contain spillovers from bank failure. Policy debates in the U.S. are chiefly preoccupied with concerns that banks should never be “too big to fail”; that private investors rather than taxpayers should hold “contingent capital” which in a crash can be converted into equity and that improvements to the functioning of “over-the-counter” markets must be made through the greater use of centralised trading, clearing and settlements. These proposals are less about modifying capital requirements and more about prohibitions and taxation.”

Where Europe and the US find common ground is in the understandable enthusiasm on the part of politicians to play to public anger against the banks. This takes the form in both the US and Europe of indulging in some big bank bashing and plans for grabbing some relatively serious tax revenue from the “culprits.”

In fact, Persaud argues that the entire focus on trying to find ways out of the “too big to fail” dilemma by, for example, forcing banks to shrink in size, is probably misconceived. He points out that some of the players that really rocked the financial services sectors in the UK and the US were a long way from the top of any global banking league table. Northern Rock and Bear Sterns are obvious examples, but even Lehman Brothers itself was no Bank of America or Citibank.

Persaud’s article is excellent and well worth a read. He argues that despite the divergences appearing between the European and US approaches to regulation, there are some strong points emerging from both. The countercyclical “capital buffers” approach of the Europeans is great, as is the US interest in fragmenting large financial institutions (splitting of proprietary trading desks, and so on). The debate over reregulation clearly still has a long way to run.

Further reading on bank regulation and the G20 Summit 2010

Tags: banking , economic recovery , EU , financial crisis , G20 , regulation , transparency , US
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