As global supervisors wrestled this week with the Basel capital rules, the Trump Administration threw another “America First” position paper on the bonfire that increasingly characterizes cross-border global standard-setting.  The EU regulators standing firm on a low output floor are ever-ready to blast President Trump for the growing disintegration of any number of ongoing post-crisis negotiations, but global regulatory disintegration reflects far more than simply U.S. protectionism.  The “America First” policy enunciated in the latest Treasury report hits very sore nerves given the President’s approach to foreign, defense, and trade-in-goods policy.  It is indeed unbecoming to demand that America be first, but it’s also unbecoming when national or continental regulators defend lax rules to preserve national-champion companies.  As of this writing, Basel IV is turning into Basel broken.  With the IMF this week finding that cross-border resolution for GSIBs and GSII is still far more a prayer than even a realistic hope, it’s time to turn from hundreds of pages of complex credit-risk rules to resolution, the only cross-border standard we need is to make national differences a matter for home-country discretion, not a source of global cataclysm.

The combination of high hopes for global harmonization and dozens of working groups of technical experts housed in comfy central-bank surroundings has led global standards-setters to issue an increasingly complex, prescriptive, and contradictory body of edicts since the 2009 G-20 summit set all this in motion.  By 2013, it was clear that global rules were fragmenting.  Then as now, the reasons are not so much protectionism housed in policies dubbed “America First,” but rather the profound structural differences in how national financial markets function within the broader global framework.

I tried to lay this out in testimony I gave before the United States Trade Representative in 2013.  Re-reading it now, much of what I then feared has come all too true:

If not quickly addressed, this collapse of global standards into nation-by-nation financial standards will, I believe, promote a “banking-by-border” framework with profound systemic risk.  Finance is simply too instantaneous and mobile to be walled off behind nominal regulatory barriers.  Failing to create a global trade-in-financial-services framework that reflects the hard lessons of the global crisis will repeat the incentives that created lowest-common-denominator standards before the 2008 debacle.

The testimony went on to urge reorientation of FSB, Basel, IAIS, and IOSCO work to cross-border resolution and trans-national risk migration, with a few stops along the way for risk arbitrage.  Anyone???