Internationalizing Financial Regulation
Martin Wolf’s ideas for financial regulation:
First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.
Kevin Drum likes this a lot.
I’m not sure how much of this can stick in an industry where the product and the inputs (just money, really) can cross international borders so easily. Shut down some antics in London and they move to Zurich.
Relatedly, with a lot of regulatory ideas you need not only to write good rules down on a piece of paper in advance, you need to pull the trigger when the time comes. Say you resolve to “prevent off-balance-sheet activities” and write some rules. Then it’s 2017 and so-and-so at GiantBankCorp finds some kind of loophole. By 2019 everyone’s using this loophole. So some bureaucrat at Treasury says, “hey we should really rule that this amounts to an illegal off-balance-sheet activity and shut it down.” Next Tuesday there’s a story in Roll Call about how a group of GOP House members, joined by a bloc of moderate Democrats and even some liberals from the New York City area have written a letter to the Treasury Secretary warning that the proposed rule would reduce US financial services competitiveness. And you have to understand, this isn’t going to be a front page headline in Roll Call—this is 2019, not 2009, and the general public doesn’t care about banking regulation anymore—it’s buried in some backwater. The only people following the issue are financiers and lobbyist types. And, hey, the Secretary tells himself that the critics aren’t even wrong. Closing the loophole won’t shut the activity down, it’ll just ensure that the loopholes are being exploited out of the London office. Who does that help? What could go wrong?
20 Responses to “Internationalizing Financial Regulation”
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October 23rd, 2009 at 1:10 pm
I’m not sure how much of this can stick in an industry where the product and the inputs (just money, really) can cross international borders so easily.
Spoken like a private equity underwriter (PEU)
October 23rd, 2009 at 1:17 pm
I’m not sure how much of this can stick in an industry where the product and the inputs (just money, really) can cross international borders so easily. Shut down some antics in London and they move to Zurich.
I would mention that it is possible to put some limits on free movement of capital, and in fact many countries do so, but that would give Matt the vapors.
October 23rd, 2009 at 1:21 pm
I’m not sure how much of this can stick in an industry where the product and the inputs (just money, really) can cross international borders so easily. Shut down some antics in London and they move to Zurich.
Require all international currency transfers to be between central banks. Any national would have to acquire foreign funds through his central bank. Central banks could then regulate runs on currencies.
October 23rd, 2009 at 1:23 pm
cf: GWB: “Why raise tax rates when people will just find loopholes with their fancy accountants.”
October 23rd, 2009 at 1:32 pm
Why not just suggest a tax increase? It works for coke, fast food, gas, and alcohol, but it doesn’t work for banks? Tax the f*ck out of them for the purpose of reimbursing the taxpayers after the banks have f*cked us over once again.
October 23rd, 2009 at 1:32 pm
Yep. That’s how the game is played.
I gather that the Up Against the Wall, Capitalist Swine Act of 2009 has stalled in committee? Pity. I was sort of hoping that all those tea party protesters were onto something.
October 23rd, 2009 at 2:01 pm
I would mention that it is possible to put some limits on free movement of capital, and in fact many countries do so, but that would give Matt the vapors.
Why would it give me the vapors?
October 23rd, 2009 at 2:02 pm
Was it my past posts about how we should think about imposing international capital controls that made you so sure I’m a knee-jerk opponent of international capital controls?
October 23rd, 2009 at 2:19 pm
OK Matt, but then it is better not to start your post here by conceding the main argument (smart bankers can just close shop and move to London/Zurich/Liechtenstein).
October 23rd, 2009 at 2:42 pm
MY “Admittedly I Really Don’t Know What I’m Talking About, But…(Part 1)”
Excellent title. And there is nothing I like more than a mostly honest man. And it seems to me, in this desperate hour, it is the people who really don’t know what they’re talking about that we should be listening to.
I look forward to Part 2.
October 23rd, 2009 at 2:56 pm
Paul Krugman: “and I had a long, very unpleasant phone conversation with a Senior Administration Official who berated me for my anti-market ideas.”
That’s the problem with the Kruger. He’s too passive. He’s like a boxer trying to win the fight on points, even if it takes him 425 rounds. We need the old boy to come out swinging, and knock some motherfuckers out.
Then, when he’s Zsar of the Economies, he can send people like this rude Senior Administration Official to Wasilla, to dig ditches in a government works program laying fiber optic cable.
October 23rd, 2009 at 3:59 pm
It is not a law of nature that capital can move freely while labor can not. It is a political choice. Different countries have made different political choices at different times.
And while capital controls or equivalents might hurt the profitability of Wall Street, let’s have some proof before the implicit assumption that it would hurt the rest of America.
October 23rd, 2009 at 4:07 pm
With regard to antics, how is it that Canadian and Spanish banks didn’t get stung trading CDOs in the recent downturn? If it’s simply a matter of changing venues to do trading, then they could have done so as well (and gotten stung along with the other Major European and American banks). Granted the Spanish banks had their own real estate bubble to deal with, but their problems didn’t originate with trading of CDOs (I think the Danish are in this category as well, but am unsure). These countries seem to exert some control over domestics banks, even when these banks have branches outside their borders. Am I mistaken here?
October 23rd, 2009 at 4:52 pm
So when it comes to finance, the Neocon realpolitik ideology of non cooperation suddently is ok? Eh?
And my idiotic textbooks suggested security cooperation is harder than economic cooperation. Fools must have written them.
October 23rd, 2009 at 5:17 pm
The race to the lowest global common denominator on worker/pay, taxes, and regulations continues. The big money boys (via their political donations/hired lobbyists) stand to win big.
October 23rd, 2009 at 6:36 pm
It is not nearly as difficult to do this as you might think, because if you get Europe, U.S. and Japan on board, plus the Oil States, all of a sudden you have a huge percentage of the worlds wealth tied up in this regime.
The suggestions that he makes are not ones that would be easy to evade. Require any bank doing business in the U.S., Europe to abide by these standards. Please don’t fall for the free market crazy talk that this will go somewhere else. Is there another New York? Are there like 20 cities that can replace London and Tokoyo? No.
Then his #5 is simple and wouldn’t require really any major changes to our system. Look up EBITA and you will see that we for some reason have favored debt over equity financing in almost every case. Equity means you lose your money first.
Preventing off balance sheet activities is simple too. We have stupid accounting rules that allow this for some reason. Simply require everything a company does to show up on the balance sheet in some place and then this huge problem goes away.
Also Remember, most money is computer money. In other words, it gets pushed around the globe in computers. It is not a problem to track every dollar in the world. If any dollars engaged or earned from illegal trading immediately become non-elgible to extinguish U.S. tax liabilities, these dollars will immediately would become nearly worthless.
We have the ability to track money flows of all sorts, we just do not use it.
October 24th, 2009 at 7:31 am
“GiantBankCorp”
Too goddamn funny. It’s true. It really is. That’s our future. There won’t be any need for disguises.
“Hi there, half-broken homeowner! We are GiantBankCorp, the only bank left on Wall Street. The United States Government has entrusted us to meet ALL of its multifarious trillion dollar banking needs. Why don’t you think of us when it comes time to do your petty-ass banking too?”
October 24th, 2009 at 8:38 am
Big Ed Schultz was hammering away at somebody the other day, maybe it was one of those weasel New York City bank/liberals, I wasn’t watching, but my ear caught Big Ed as he began to ramble on about handing money out to local banks, out there where the people are, so banks can loan em some money, loan small businesses some money. Big Ed says: Why can’t we do this? Big Ed says: I don’t understand this? This is unacceptable! The American people need money! Small businesses need money! Let’s loan it out to em! By golly, I just don’t understand this.
Big Ed. He did my brother, a guy he’s never met, a pretty big favor for no reason about 18 months ago. Schultz gave my brother’s small business several pleasant radio shout outs over the span of three or four months, even though Buffalo was not in his market at the time -just because my brother called into show a couple times from Detroit and chatted. And when he came to Buffalo recently, Ed Schultz, now a big TV-Star, gave the business another little shout out, even though my brother had not had any contact with the man since the two calls. That tells me something.
They got Rush Limbaugh and we have Ed Schultz. What miserable existence it must be for “those people over there.”
October 24th, 2009 at 12:33 pm
[...] came up in comments to this post, so it’s worth saying explicitly: I think it’s a lot easier to imagine a workable [...]
October 26th, 2009 at 9:33 am
“Require any bank doing business in the U.S., Europe to abide by these standards.”
It’s not quite as simple as that. There are international treaties governing this sort of thing. For instance, in Europe, banks operate under a home/host regulator system, whereby EU banks operating in another EU country are mainly regulated by their home supervisor rather than the host. Unilateral action against those branches simply isn’t possible. That was the problem with the Icelandic banks in Britain (Iceland is in the EEA, and operates under the same home/host system).
That said, a lot of Wolf’s proposals are being implemented at an international level – higher capital requirements, anti-cyclical capital, dynamic provisioning, stricter controls on balance sheet treatment, better contingent capital buffers. Unfortunately, regulation takes a lot longer to be implemented when it’s done multilaterally, because everyone has a say and there are a lot of different priorities and conflicting interests.