Fisher Investments Editorial Staff
Geopolitics, Developed Markets

One Lord to Rule Them All

By, 06/07/2011

Story Highlights:

  • The EU and US are at odds about the pace of new financial regulatory reform.
  • Meanwhile, Treasury Secretary Geithner proposes creating a new, joint EU-US global financial overlord to oversee banking rules in Emerging Markets.
  • It’s not surprising different nations aren’t moving in lockstep on regulation—but we do think there are pluses and minuses to harmonized banking rules.

In the latest international financial intrigue, the EU is pressuring the US to speed up implementing new banking rules—because they fear the US could have an “unfair advantage” over EU banks. Faced with criticism, the US is now suggesting European regulators are too lax with their definitions of capital, which could make it easier for EU banks to hit required capital ratios.

Meanwhile, US Treasury Secretary Tim Geithner wagged his finger at primarily Asian markets, warning them against trying to use too-lax banking rules (in his view) to take banking business from the US. He wants a “global deal” with common rules (and presumably, a global overlord to monitor them all) on derivatives trading rules and capital ratios—sentiments the EU largely echoes. (This isn’t unlike the EU scolding Ireland to raise its corporate tax rate so Ireland doesn’t seem more competitive—though they could just as easily cut theirs to equal the Irish. But never mind.)

Piling on, a Fed governor recently suggested that in some cases, capital ratios ought to be double Basel III requirements (which signatories agreed to not a year ago—the ink is barely dry), as high as 14% of assets. And sure, we could have capital ratios as high as 50% (which likely won’t happen and we think is a terrible idea, but this is a hypothetical exercise), and we could have one overlord to dictate all banking regulation and dole out punishment globally. But that begs the question: If one person (or body) is policing banks globally, who’s policing him (or it)? (The Coast Guard?)  Further, if some accounting board can change the rules on how banks account for certain types of capital, then even a ridiculous capital ratio of 50% can get cut in half or more instantly (a la FAS 157).

It’s really not that surprising different nations aren’t moving in lockstep on regulation—it’s a major beast with many moving parts. But the bigger issue here is that it’s clear, globally, regulators presume more and stricter and more coordinated regulation would have prevented 2008. Which is a false premise that assumes regulators can accurately diagnose a problem (they might, but frequently don’t), ascribe the correct fix ahead of time (possible, but again, frequently doesn’t happen) and foresee all potential consequences of said fix (just plain not going to happen). Don’t get us wrong, we think there are pluses to more harmonized banking regulations—but there are also minuses. While it doesn’t make much sense to have radically different baseline rules from country to country, there are also regionally specific matters that broad brushstrokes are unlikely to address well.

Heck, while we’re at all this regulatory reordering, maybe we could assign someone to assess potential negative consequences of new rules—in other words, a global regulatory body regulating regulators globally. Then again, we’d need someone to regulate them too, we suppose.

Followed to its extreme, this regulatory shuffling can create a vicious circle of regulation and regulators—where ultimately we end up with a global alphabet soup of regulatory acronyms containing everything from Chinese characters to the Cyrillic alphabet, all trying to leapfrog one another for jurisdiction. Banks—and the nations they operate in—would be better served by regulators taking a measured approach to regulation that keeps their own fallibility in mind.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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