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Global banking - You break it, you own it

2013-11-27 11:48:43

America should give global banking rules and Europe s dilatory regulators one

last chance

SOME wounds go on hurting for years after they were inflicted. For bank

regulators, the trauma of the collapse little more than five years ago of

Lehman Brothers is as raw as if it had just happened.

Lehman had spanned the world, and was run as a single entity largely overseen

in America. Its disintegration caused rancour almost everywhere. Britain

complained that it had been allowed to snatch $5 billion in cash from its

London operation just days before the bankruptcy. Germany fumed that the

Bundesbank had been saddled with defaults on about 8 billion-worth ($11

billion) of loans the central bank had made to Lehman s German subsidiary.

Since then regulators around the world have done much to avoid a repeat. Many

of their actions, such as making banks hold more capital, have been sensible.

But the rulemakers have also been quietly carving up the global financial

system.

Britain is forcing the local operations of foreign banks to hold more capital.

In Germany regulators have told the subsidiaries of Dutch and Italian banks not

to send cash out of the country. But the biggest move could come in America,

where the Federal Reserve will soon publish rules governing the operations of

big foreign banks that will, in effect, throw up a wall around America s

financial markets (see article).

This rush to reduce the risks posed by the collapse of big foreign banks is

understandable. Regulators are accountable to taxpayers at home. And, given

Europe s tardiness in cleaning up its own banking system, who can blame the

Americans for wanting to insulate themselves from its troubles? European banks

are still undercapitalised compared with their American peers. In an ideal

scenario, forcing Barclays or Deutsche Bank (let alone shakier local German

lenders) to put up more capital would make the whole system safer everywhere.

But reality is not that simple. To begin with the Europeans may well retaliate.

France s big banks are already lobbying the European Commission to impose

retaliatory restrictions that will keep JPMorgan and Goldman Sachs out of

French bond markets (even though the American banks are better capitalised).

That will fragment global finance.

Walling off banking systems will increase the costs of borrowing, especially in

small or fast-growing economies that need to import capital. It will cut

returns to savers in countries with excess saving. McKinsey, a consultancy,

reckons that fragmented banking systems could trim global growth by almost 0.5

percentage points a year. And a more fragmented system, even with

better-capitalised local banks, is not necessarily safer. Risk will be more

concentrated if banks cannot spread it around the world, and failures more

common if they cannot move capital to bail out ailing units.

Hurry up and wait

The Fed s impatience with Europe is understandable. America has cleaned up its

banks and Europe has not. European regulators need to use the European Central

Bank s forthcoming asset-quality review to show they are serious about doing

so.

But even the Americans admit that the best system, for big banks, is a global

one and there are ways of making a global system safer. Banks could be forced

into structures that would push losses from their subsidiaries up to the parent

and send capital down to struggling subsidiaries. Big cushions of equity and

bail-in debt held centrally could reassure regulators.

For that to happen, there need to be formal deals between the main financial

centres. The Financial Stability Board (FSB), a club of supervisors and central

banks, is championing these ideas, but neither the Americans nor the Europeans

have done enough to push them. If the Europeans get serious about cleaning up

their banks, the Americans should make one final, genuine attempt to get the

FSB s global rules to work.