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Friday, September 04, 2009


Regulatory protectionism won’t stop shocks

The financial markets crisis has led to many proposals for reform in an effort to prevent future calamities and increase stability.

To be sure, the urgency of bold moves to change things has vanished in the last few months. But one thing that hasn’t gone away is the thrust that may lead to more economic nationalism. The US, for example, intends to supervise the top 25 financial institutions in the US regardless of their ultimate domicile.

“There is a danger that changes in the regulatory environment will, by accident or design, lead to a re-fragmentation of markets,” warns Josef Ackermann, chief executive of Deutsche Bank. “The proposal that large internationally active financial institutions should essentially be reduced to holding companies of national operations as stand-alone institutions is not the right answer.”

“The regulators are putting an anchor on globalisation,” adds one senior HSBC executive succinctly. “We are seeing more territoriality on the part of regulators.”

Underlying that fear is the fact that regulators no longer trust each other. Indeed, they have quietly blamed peers (as Fed officials blamed the FSA in the UK for discouraging Barclays from buying Lehman before its collapse) and dread being hostage to the failures of their foreign counterparts.

One possible consequence of such a lack of trust may be a world in which each jurisdiction dramatically increases the amount of capital any bank operating within its borders has to hold. Such regulatory efforts to make one’s own markets safer may be logical when considered in isolation. Yet these proposed measures are already leading some banks to reconsider their global strategies and withdraw from some markets since they themselves can no longer allocate capital in ways they consider economically rational.

Of course, such regulatory concerns are natural given the rest of the world’s experience of America’s adventure into the brave new world of securitisation. Indeed, to many regulators around the world, it seems the primary export from the US in recent years has been dud financial products, the financial equivalent of toxic milk powder from China. “The American regulatory regime enabled the disaster,” says a top executive of an international bank in the US.

For example, Dutch authorities had to buy troubled US Alt-A mortgage securities to help one of its banks. Residents of Hong Kong and China were among the many victims of the bust debt of Lehman Brothers when the securities firm went under. The Swiss National Bank had to establish swap lines with the Federal Reserve in case ailing UBS (with assets four times the size of Switzerland’s GDP) needed shoring up, as a result of UBS’s calamitous foray into American mortgages.

At the same time, there has been a backlash in the US against providing funds to non-US banks. For example, the Fed is compensating foreign banks, such as Société Générale of France, that acted as AIG counterparties and backstopping the credit default swaps AIG sold these banks.

Of course the money that the US government has come up with to help recapitalise American financial institutions involves restrictions on foreign staff in their domestic operations.

Suddenly globalisation no longer seems like such a neat idea.

The problem with all this is that the consequences are likely to be unpredictable or unfortunate. For example, Vikram Pandit, chief executive of Citigroup, notes that his bank employs more Americans abroad than foreigners at home.

In Lords of Finance, Liaquat Ahmad’s look at international finance in the first half of the twentieth century, there is a wonderful scene in 1913 London where the British government is trying to get its head around the fact that Lloyd’s of London has insured the ships of the German merchant marine. Such interconnectedness wasn’t enough to prevent the First World War but one could argue that the greater the links, the less likely armed conflict becomes. Globalisation may have its drawbacks but so does its opposite.

By Henny Sender


Copyright The Financial Times Limited 2009




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