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The next time banking regulators gather in the Swiss city of Basel to discuss the finer points of capital regulation, they will need a bigger room. The Basel Committee on Banking Supervision, which sets global standards for the banking industry, is adding seven members.
The inclusion of Australia, Brazil, China, India, South Korea, Mexico and Russia expands the committee’s membership to 20. It also gives a more global mix to a grouping that, with the exception of Japan, previously consisted only of European and North American members.
These moves reflect a recognition that the problems of the global financial system cannot be solved just by the west. The Group of Seven club of rich nations has been displaced as the main forum for international summitry by the G20. Given the increased economic clout wielded by countries such as China and Brazil, this seems only logical. Not long ago, emerging economies would look to the US and Europe to lead the way in drawing up banking rules. But the western approach to financial regulation has been discredited by the crisis.
Reaching consensus may be even harder in the future. “You have got new players coming on the scene, and that means the arrangements that are currently around get put under pressure,” says Michael Foot, a former Bank of England and Financial Services Authority official who is now UK chairman of Promontory Financial Group.
What happens if politicians fail to agree? The most likely outcome is that decades of global financial integration begin to unravel. Under pressure from governments eager to see taxpayers’ money spent at home, banks are already withdrawing capital from areas such as central and eastern Europe.
National regulators are also putting up greater barriers. The FSA has angered foreign banks by proposing regulations that could require them to hold a greater proportion of liquid assets in their London subsidiaries. The system whereby any European Union bank can offer its services in another country without opening a separate subsidiary – a key part of the single market – is also under threat.
If pursued to their logical conclusion, these trends could make it harder for financial institutions to operate across borders. If banking again became a largely national industry, the size of financial institutions would be limited by the size of the economies in which they are based. The idea that countries can develop a competitive advantage in financial services – a main driver for the expansion of the City of London in recent decades – would be dismissed. Competition would be reduced and the cost of debt for companies and consumers would be likely to rise.
When the G20 delegates troop into the Excel centre on Thursday, they will have to make a difficult choice. As Dirk Schoenmaker of the Duisenberg School of Finance in Amsterdam points out: “A stable financial system, an integrated financial system and national financial autonomy are incompatible.” One of the three must be sacrificed.
Given the damage caused by the crisis, stability must come first. But this can be achieved on an international basis only if politicians – and the taxpayers who elect them – are willing to cede some control over the purse strings.
Read the text about overhauling financial regulation in Europe and the US and distinguish advantages and disadvantages of such overhaul from the viewpoint of banking industry executives
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