Banking Regulation Heads Down Protectionist Path

By Barbara Rehm

Confusing crosscurrents are rippling through global financial supervision. Consider these four recent moves: the Financial Stability Board agrees on ways to improve supervision of the world’s largest banks; the Federal Deposit Insurance Corp. strikes a deal with the Bank of England on resolving troubled banks that operate in both countries; the Basel Committee on Banking Supervision dilutes tough international liquidity standards; and the Federal Reserve Board proposes a sweeping crackdown on foreign banks operating in the U.S. So that’s one instance of coordination, one of cooperation and one of trying to make it easier for everyone to get along counterbalanced by an example of circling the wagons. That might make the Fed’s move seem like the outlier; that regulators the world over are trying to work together to make the collective system safer. But that’s not what’s happening. In fact, of those four actions, the one that says the most about trends in global supervision is the Fed’s foreign-bank proposal. “This isn’t just one more set of ‘ring-fencing’ ideas. … This is much more than that,” says Charles Dallara, the managing director of the Institute of International Finance. “It cuts to the very heart of whether or not we can stabilize financial systems without basically drawing the blinds on our borders from a financial point of view.” Karen Shaw Petrou, managing partner of Federal Financial Analytics, says that’s exactly the future she sees. “What this tells us about the harmonization of banking supervision is that it’s a hopeless dream,” Petrou says. “This ‘my way or the highway’ approach is increasingly the way international bank regulation will be handled.”