Saturday 24 Oct 2020 | 23:40 | SYDNEY
Saturday 24 Oct 2020 | 23:40 | SYDNEY

Why wait for uniform banking rules?


Stephen Grenville

2 February 2010 11:10

Globalisation puts pressure on countries to adopt internationally uniform economic rules, so that international interactions are as frictionless as possible. This is Tom Friedman's 'golden straitjacket': sometimes inconvenient, but in the long run usually beneficial. From time to time, though, the straitjacket needs readjusting.

The Global Financial Crisis showed the deficiencies of the existing international rules on banking, formalised by the Basel Committee on Banking Supervision. But there are two problems. First, it took the Basel Committee a decade of vexed negotiation to put in place the last (relatively minor) upgrade of the rules, and that may be too long to wait for the next iteration (which in any case needs to be more thoroughgoing).

Second, not everyone needs exactly the same rules. For a start, not all banks were using 'The Bonfire of the Vanities' as their business plan: maybe there is something idiosyncratic about the financial systems in the US, UK and the other crisis countries. As well, the cross-border problems of prudentially supervising the hugely-complex global US and UK banks simply don't apply to most of the world's banks, whose main activities lie within one jurisdiction.

It might be better to adopt a two-track path. The Basel Committee should continue its efforts to achieve a degree of international uniformity, understanding that the consultation process will not only be tortuous (they hope to have something in place by the end of 2012), but it will inevitably be a lowest common denominator regulation ('light touch' supervision was the term used last time round).

In the meantime, individual countries should feel free to put in place whatever they think they need to support a well functioning financial sector which doesn't require a taxpayer bail-out every decade or two.

Will this inhibit some governments from imposing more rigorous requirements than others, for fear that their financial sector will move elsewhere? Taxpayers in Iceland and Ireland (and perhaps even the UK) might be happy enough to see this financial activity contract, to be replaced by something a little less risky. As the Governor of the Bank of England remarked, banks live internationally but come home to die, at taxpayers' expense. In any case, a well regulated system may be a more attractive operating environment for the kind of enterprises that we would want to attract.

The international debate in Basel is often helpful for the domestic policy-makers, not only for the ideas and brain-storming, but also in making them braver to put in place measures which the domestic vested interests will find unpalatable.

But it would be a mistake to delay action just because, in the words of the IMF's Managing Director at the Davos gab-fest last week, 'we need a multilateral solution'. President Obama will have enough problems trying to get the Volcker Rules through Congress without also having to persuade the Basel Committee.

Photo by Flickr user tamaki, used under a Creative Commons license.