“This”:http://www.economist.com/blogs/charlemagne/2009/03/do_not_believe_this_talk_of_eu.cfm seems pretty plausible to me.
The opening hours of EU summits can often be a little slow (so can the closing and middle hours of some of them, to be frank). But the sense of calm, even drift, is a little eerie this time. … behind this time of phony war there lurks the prospect of a proper policy fight. Not about stimulus plans, but about future regulation of the financial sector. And, to simplify things, what is really, really going on is that the camp led by France and Germany are determined that Europe’s common position, going into the G20 summit, should be to bang the table and demand an end to light-touch regulation, of the sort that flourished for so long on Wall Street and in the City of London, and which they see as more or less the sole cause of the current mess. But the French and Germans do not trust the British to support that common position. Once the Americans are in the room in London, they fear the British will scuttle away from the European position, side with the Americans, and seek to defend the wheeler-dealers of the City.
The post finishes with some obligatory Economist-style harrumphs about how the unregulated bits of global capitalism aren’t really the problem &c &c, but its analysis of the underlying politics seems spot on. Differences between national regulatory systems are still enormously important, and help explain why we have seen so little international coordination on common frameworks for financial regulation. Not only are differences in regulation associated with different national interests, but also with very different analyses of what the underlying problem is (which of course in part stem from those interests). Abe Newman at Georgetown and I have a paper on historical institutionalism in international relations that talks a _lot_ about the persistence and importance of these national level differences in explaining international outcomes. Our framework (as others, such as Dan Drezner’s) would predict likely stalemate in negotiations of this sort. I honestly hope that we’re wrong (although I suspect that we are not). But even if we are, the problems that the EU faces in coordinating a regulatory response are, of course, dwarfed by the problems of coordinating such a response at the global level, which is where it _really_ needs to take place (but is highly unlikely to, for the reasons given).
{ 13 comments }
P O'Neill 03.19.09 at 8:08 pm
There a lot of complications. For one thing, I don’t think Gordon can scuttle away quite so transparently from the proposals for better international coordination since it’s a vital part of his favourite asset protection scheme — the one protecting his own reputation. Because crucial to his PR about the crisis is that it happened because of failures of regulatory coordination, and not because the UK system of regulation (designer: G. Brown) was asleep at the wheel as regulated institutions got themselves into such trouble. Now it looks like if Darling and Turner and the rest of them are left to their own devices, they might actually come up with a decent plan which would focus on filling the holes in the UK system, and likewise the US can achieve a huge amount by reforming national regulation without anything needing to be coordinated internationally. But Gordon is going to need to continue to claim that international coordination is important, and that the fix is more than just getting national regulation right.
Another challenge with international coordination is implementing it. Basel II was supposed to the data aspect of how banking regulation would be coordinated. But once it got reduced to a few core indicators which could be manipulated, it became part of the problem.
Barry 03.19.09 at 8:38 pm
Somebody’s comment there – ‘the profits of nonregulation are concentrated in London; the costs are spread out all over the world’.
Sebastian 03.19.09 at 8:47 pm
Isn’t the real problem leverage? And while that is certainly amenable to global regulation, isn’t it the case that the European banks were even more ridiculously leveraged than most of the US ones?
peter 03.19.09 at 9:16 pm
” Not only are differences in regulation associated with different national interests, but also with very different analyses of what the underlying problem is”
And associated with different national cultures and values. What British regulator, for example, could ever conceivably house itself inside the offices of the very company it was regulating, as the German national telecommunications regulator did at DeutscheTelekom? Conflict of interest would seem to be a concept alien to German society.
notsneaky 03.19.09 at 9:21 pm
Probably should mention Dani Rodrik’s article in the same (?) issue about why Global Financial Regulation might not be a good idea in the first place.
Mrs Tilton 03.19.09 at 10:31 pm
notsneaky @5,
yep, same issue. I believe the
magazinenewspaper has also invited various people to have a go at Rodrik’s argument on its website.notedscholar 03.19.09 at 10:38 pm
If we accept Thomas Ferguson’s “investment theory of politics,” we have an additional reason to think global regulation will not happen; namely, those funding politics won’t want themselves to be regulated.
NS
John Quiggin 03.19.09 at 11:18 pm
The way I imagine global financial regulation emerging is as a consequence of the breakdown of the current global system, rather than as an attempt to control it. The model I have in mind is world trade after 1945.
We’re already seeing a retreat of financial institutions to the home market where they are guaranteed by their own national government. Rebuilding a global financial system with players like this will require international co-operation.
Henry 03.20.09 at 12:45 am
I haven’t seen the Rodrik piece b/c I don’t read the _Economist_ any more; just the Charlemagne blog – anyone have a link for it? I am presuming it is a version of his previously articulated ‘global policy coordination ain’t gonna work, so we need capital controls’ trilemma (but am happy to be disabused if I’m wrong).
notsneaky 03.20.09 at 3:06 am
http://www.economist.com/finance/displaystory.cfm?story_id=13278147&CFID=47797291&CFTOKEN=12677347
BJ Feng 03.20.09 at 7:00 am
Don’t forget that Basel II was hailed as a revolutionary regulatory model, but it’s the reason why European banks are so much more leveraged than US banks which have not implemented it yet. Under Basel II, the higher rated the bond or obligation a bank holds, the more it counts towards capital. So all those AAA rated mortgage bonds and derivatives were counted nearly as much as US Treasury Bonds, that is until they started falling in price and receiving downgrades.
This was as much a regulatory failure as anything else. All the regulators were asleep, so they now wake up and claim there was no regulation at all. THAT is the political trick being used right now, shift blame so that the regulators ie. the current government, doesn’t look bad or incompetent. So now we’re supposed to trust the same people to come up with even more regulatory bodies and more complicated regulation when they totally screwed up the regulations that got us in this mess in the first place? Humm…
Ginger Yellow 03.20.09 at 12:27 pm
“Don’t forget that Basel II was hailed as a revolutionary regulatory model, but it’s the reason why European banks are so much more leveraged than US banks which have not implemented it yet.”
I can’t quite agree, although there’s certainly truth to the idea that Basel II allows greater leverage than the US system (for “traditional” banks anyway). You have to remember that Basel II only came fully into effect at the start of 2008. Most of the ramp up of leverage happened under Basel I, or at the very least during the parallel running period where any Basle II reduction in capital was capped.
Also to quibble somewhat, “all those AAA rated mortgage bonds and derivatives were counted nearly as much as US Treasury Bonds” isn’t accurate. AAA rated mortgage bonds counted infinitely more than T-bills, just not much on an absolute scale. The B2 risk weighting for a T-Bill is 0%, whereas it’s 7% for a senior AAA tranche of a securitisation (for an IRB bank anyway).
Now, I don’t mean to suggest that Basel II didn’t contribute to the crisis in some ways, and its lack of an absolute leverage ratio was probably a mistake – one that the BCBS is now proposing to rectify. But in other ways, if it had been implemented earlier, it would have prevented (well, disincentivised) some of the things that helped cause the crisis, like huge ABCP exposures relative to balance sheet (think IKB). The treatment of liquidity facilities under Basel II is far, far more sensible than under Basel I, or for that matter US Gaap.
Ginger Yellow 03.20.09 at 12:33 pm
Also, with regard to the initial post, I don’t doubt the French and Germans feel that way, but I think they’re mistaken for the most part. If you look at the proposals in the FSA’s Turner Review, the majority of them require and call for international coordination, at the EU level and higher. including the leverage ratio, the core funding ratio, and anti-cyclical capital buffers. The FSA claims to be surprisingly keen on delegating power to a European super-regulator. Of course, it may not follow through on everything, but it’s staked what’s left of its credibility on these reforms, and if anything, it should be worried about the French and German governments not wanting to give up their regulatory discretion.
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