Working out this morning, I happened upon the Norwegian Bluegrass Festival and a band named the “Norse Bluegrass Flamingos.” Flamingos? If Bill Monroe and his Bluegrass Boys ever saw a flamingo, it was a pink plastic one stuck in the front yard near a wrecked Chevy that was gonna be fixed up soon as hunting season’s over for sure. Cross-border translation isn’t easy. Can the FDIC handle it any better as it seeks cross-border comity on systemic resolutions?
I sure hope so, but I fear that the U.S. commitment to orderly liquidation without taxpayer recourse is a very exotic bird. Sure, the Financial Stability Board is doing its darnedest to take its 2011 “key attributes” and turn them into something a bit more concrete and binding for cross-border banks. We’ll see the next round shortly and it will almost surely give the U.S. and U.K. efforts a boost. It might even help the EU. As always, it’s engaged in the one-step-forward, two-step-back tango that defines the European decision-making dance. In the wake of the Cyprus debacle, consensus has strengthened that cross-Eurozone resolution protocols are critical. There’s even lots of talk about cross-EU resolution and deposit insurance. Even the Chinese are now contemplating deposit insurance, although when it and the EU actually implement anything is anyone’s guess.
It isn’t that any of the nations struggling with TBTF like it that way. The problem is that statutorily and structurally, their financial systems are inherently different from the U.S. one. Even Canada – the neighbor to the north with which the FDIC this week signed a cross-border cooperation agreement – is very different. Its banking systems are concentrated in a few banks that are very large in relation to GDP — banks expressly intended to be national champions even though subject to far better supervision than usual in such cases. A fellow member of what used to be called the “English-Speaking
Union” – the U.K. – also wants to end TBTF, but disentangling a financial system long premised on a few banks that dwarfed the Kingdom is proving anything but easy.
The single-point-of-entry (SPE) resolution protocol adopted last year by the U.S. and U.K. is supposed to leap borders. It stipulates systemic resolution at the top-tier of a holding company, essentially putting the home-country regulator atop the pile to sort out the pieces down below. This is an ambitious approach and one I expect the FSB soon to endorse. However, a Basel alternative we analyzed late last week makes clear that international consensus on SPE is a long way off, as is progress here and in the U.K. to build SPE out into a more realistic, less rhetorical, construct.
Right after Dodd-Frank was enacted, I had lunch with a group of Japanese bankers. Talking about the new U.S. standards, one asked me about the “sci-fi” designation. Thinking first about Star Trek, I was briefly perplexed. Then, I realized sci-fi was his way of saying SIFI – and not unreasonably, when you think about it. Lunch proceeded, but the point here is more than linguistic. So far, it’s just science fiction to expect cross-border SIFI resolution that’s orderly, harmonious and executed seamlessly without taxpayer recourse. It’s a happy dream and not one to abandon, but I think we’ll achieve it by slogging first through a more prosaic set of cross-border financial standards that facilitate trade in financial services without expecting all of the rules everywhere to be all the same.
I’ve written a lot about the how-to here and plan shortly to update this framework in light of the Trans-Atlantic and Trans-Pacific trade talks. These two might be a bit utopian, but at least they’re seriously under way. I’m not sure we can say the same for global financial harmonization. We’re all singing, but each nation’s song so far is distinctly still its own.