When the Federal Reserve added a new bullet-hole to the carcass that is U.S. adherence to Basel rules, it came up with an intriguing new term. The U.S. standards aren’t “different,” “tougher” or even “based on” Basel III’s liquidity standards. Instead, the U.S. approach is “super-equivalent.” I’m pretty sure that this means that, if a person is 200 pounds, he is “super-equivalent” to someone weighing in at 150 – both are the same in that both are people and both are being measured in pounds, with the fatter person just “super-equivalent” to the skinnier one. Ah, the wonders of regulatory prose when policy-makers want to persuade colleagues they are part of the global rule-making process even though mostly they aren’t anymore.
If U.S. rules are “super-equivalent,” then many in the European Union may fairly be dubbed “sub-equivalent.” And, once venturing here, one might say that nations that won’t do any of it aren’t recalcitrant or worse, they’re just “non-equivalent.”
In late 2012, we put out a detailed analysis of just how equivalent – we used the word comparable – Basel would or could be (http://www.fedfin.com/images/stories/client_reports/Basel%27s%20Burst%20Bubble.pdf). We laid out ways in which financial-market rules can be made meaningful ideals that hold nations accountable for best practice. However, we detailed structural differences that make it effectively impossible to harmonize cross-border regulation in what I guess I must now call a “really-equivalent” way.
Take, for example, just one structural impediment: the U.S. is by law and deep inclination now trying to prevent banks and other financial behemoths from failing with any type of taxpayer support, central-bank liquidity included. Most other nations, though, still see the very biggest banks as extensions of sovereign operations and back them with all sorts of official and implicit support. As a result, stress tests are muffled or non-existent, embarrassing disclosures are quashed, and rules may well be written to give even the biggest banks the benefit of any doubt – “non-equivalent” shall we say to the U.S. view of just how to cut big banks down to size. In 2012, we hadn’t yet seen one initiative the FRB may characterize as “super-equivalent” even as the European Union calls it names not fit to print. I refer, of course, to the pending proposal to put foreign bank organizations on the same cutting board on which the largest U.S. banks unhappily have found themselves of late. The EU has threatened retaliation if the rule is finalized as proposed and, since it almost surely will be, the potential for a global trade war in financial services is all too real.
Given this, the FRB should call the liquidity rule what it is: a sharp departure from the Basel framework designed to make U.S. banks not just as safe and sound as possible, but also as independent as they can be of the discount window and other taxpayer-backed facilities. I’ve lots of qualms with specifics in the liquidity rule, but none with this purpose – it will make U.S. banks not just more resilient, but also far better stewards of consumer, investor, and regulator trust. Let’s just not play games with “super-equivalent” nomenclatures. If the U.S. wants to go its own way on prudential regulation, the FRB should say so and, then, still work very hard very fast to keep cross-border finance as fair and free as possible.