Monday 20 Aug 2018 | 03:04 | SYDNEY
Monday 20 Aug 2018 | 03:04 | SYDNEY

Bidding for the financial sector


Stephen Grenville

20 June 2011 11:12

As the international community tries to work out a sensible regulatory response to the manifold failures of the financial sector in 2007-8, the best solutions may be falling prey to rivalry between countries hoping to attract the footloose financial sector.

The benefits of hosting a big financial sector are clear. Financial jobs are extravagantly paid. Cities such as London and New York depend on these big spenders for much of their zing. Where would London house prices be without 'the City'?

Two issues are currently under heated discussion. First, separating core commercial banking (deposit-taking and making simple loans) from other financial services which are provided by universal banks (proprietary trading on their own behalf, financial advice, syndicating loans, underwriting, insurance, fund management, derivatives and other financial engineering).

The case for separation is clear. It makes sense for governments to protect the core banking system. But do these other financial services deserve this same sort of blanket guarantee? Universal banks get a free-ride from the implicit protection over the whole of their balance sheets.

Conglomerate universal banks were by no means the only (or even the key) problem in 2007-8. But Paul Volcker in the USA and both Mervyn King and John Vickers in the UK, have argued this separation is fundamental to effective reform.

In response, large universal banks have threatened to take their headquarters elsewhere, to more lenient regulatory regimes. While Mayor Bloomberg is unrolling the red carpet for any bank wanting to shift to New York, those who would actually have to deal with the risks are less effusive in their welcome. The boldest response is from Tom Hoenig, respected veteran central banker and host to the central banks' annual agenda-setting Jackson Hole conference. He says that, for example, if Swiss mega-bank UBS applies to shift its headquarters to the USA, the authorities should just say 'no thanks'.

The second issue is derivatives. The combination of new regulations and natural agglomeration will tend to shift trading and clearing of derivatives towards large exchanges where there is deep liquidity. Tim Geithner wants all countries to impose uniform capital requirements on OTC derivatives, which would ensure that no country bid away the business via lighter regulation. The Germans are loath to see their shallower market threatened by compulsory uniform regulatory standards. Even Australia is fretting about this issue.

Waiting in the wings are Hong Kong and Singapore, eager to take up any slack.

Photo by Flickr user Jo@net.