Getting Banks around the World to Play by the Same Rules

Bangor Daily News (Bangor, ME), March 12, 2013 | Go to article overview

Getting Banks around the World to Play by the Same Rules


Shortly after the financial crisis spread around the globe like a plague, the world's leaders developed what they thought would be an antidote.

Working through the Group of 20, they agreed to adopt common rules for all financial companies, no matter where they operated. The global system would be less risky, the thinking went, if derivatives dealing -- an opaque, $639 trillion market -- worked more like stock trading on exchanges. If large banks had more capital, they would be able to absorb losses so taxpayers wouldn't have to. And if money-market funds and other parts of the shadow banking system were more tightly regulated, there would be fewer hidden risks.

Since that 2008 pact, progress has been made on the road to convergence. One example: Starting on March 11, Wall Street's largest banks, including Goldman Sachs and JPMorgan Chase, must process derivatives trades through clearinghouses, an accomplishment of the 2010 Dodd-Frank financial reform law, itself part of the United States's commitment to convergence. By holding collateral and standing between buyers and sellers, clearinghouses can prevent one participant's default from infecting all the others. In another step forward, the EU decided in December to create a single bank regulator.

But the dream of convergence remains, well, a dream. Conflicting national and regional laws, regulations and accounting standards have blocked the world from getting on the same page on financial reform. This, in turn, has jeopardized the ability of regulators to work across borders to address the next crisis. Shutting down a large failing bank that, say, loses all its capital because of a trading strategy gone haywire isn't possible without universal rules for resolving sick banks. Moreover, financial companies will be able to take advantage of regulatory arbitrage -- shifting operations to countries with the loosest rules.

What happened?

In the U.S., regulators have been lobbied to a standstill. …

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