1

Global Financial Regulation: Convergence or Divergence? Nicolas Véron Senior Fellow, Bruegel (Brussels) Visiting Fellow, Peterson Institute for International Economics (Washington) Asia Europe Economic Forum Brussels, January 22, 2013

A Multipolar Financial World…

Sample: listed banks in FT Global 500 ranking. Source: FT, author’s calculations 2

0%

10%

20%

30%

40%

50%

60%12

/200

012

/200

112

/200

212

/200

312

/200

412

/200

512

/200

612

/200

712

/200

812

/200

912

/201

012

/201

1

Share of Aggregate Market Value

Asian Banks

US Banks

European Banks

Rest of World

… Also in Terms of Cross-Border Flows…

Source: Andrew Haldane, “Global Imbalances in Retrospect and Prospect,” speech at the Chatham House Global Financial Forum, 3 November 2010 3

0%

10%

20%

30%

40%

50%

60%

1980 1990 2000 2010 2020e 2030e 2040e 2050e

Total External Assets

Asia ex Japan

Japan

Europe

US

Rest of World

… Even as Cross-border Intermediation Remains Mostly “Western” (and Japanese)

Sample: World’s 50 largest banks by 2011 Assets (from The Banker database).

Source: 2010 annual reports, author’s calculations 4

Asia (Avg)11.37%

US (Avg) 29.52%

Europe (Avg)52.93%

Rest of World (Avg)25.97%

0%10%20%30%40%50%60%70%80%90%

100%

Mits

ubish

i UFJ

(JP)

Mizu

ho (J

P)Su

mito

mo

Mits

ui (J

P)Ba

nk o

f Chi

na (C

N)

Reso

na H

oldi

ngs (

JP)

Bank

of C

omm

unic

atio

ns…

ICBC

(CN

)Ch

ina

Cons

truc

tion

Bank

…N

orin

chuk

in B

ank

(JP)

Agric

ultu

ral B

ank

of C

hina

…

Citig

roup

(US)

Gol

dman

Sac

hs (U

S)M

orga

n St

anle

y (U

S)JP

Mor

gan

Chas

e (U

S)Ba

nk o

f Am

eric

a (U

S)W

ells

Farg

o (U

S)

Stan

dard

Cha

rter

ed (U

K)N

orde

a (S

E)HS

BC (U

K)Cr

edit

Suiss

e (C

H)De

utsc

he B

ank

(DE)

ING

Bank

(NL)

Sant

ande

r (ES

)BN

P Pa

ribas

(FR)

Uni

Cred

it (IT

)BB

VA (E

S)De

xia

(BE)

UBS

(CH)

Barc

lays

(UK)

Soci

ete

Gen

eral

e (F

R)Cr

edit

Agric

ole

(FR)

Dans

ke B

ank

(DK)

Roya

l Ban

k of

Sco

tland

(UK)

Rabo

bank

(NL)

Com

mer

zban

k (D

E)In

tesa

San

paol

o (IT

)DZ

BAN

K (D

E)AB

N A

MRO

(NL)

Cred

it M

utue

l (FR

)BP

CE (F

R)Ll

oyds

Ban

king

Gro

up (U

K)LB

BW (D

E)

Scot

iaba

nk (C

A)Ro

yal B

ank

of C

anad

a (C

A)To

ront

o-Do

min

ion

(CA)

ANZ

(AU

)N

at. A

ustr

alia

Ban

k (A

U)

Com

mon

wea

lth B

ank

(AU

)W

estp

ac (A

U)

Banc

o do

Bra

sil (B

R)

Share of Revenue Outside of Home Country, 2010

Global Bodies: “Institutional Mismatch”

Sample: FSB and its 10 members with a global (supraregional) constituency. Source: websites / reports as of September 2012

5

Institution Nationality of Non-Exec. Chair

Nationality of Chief Executive

BIS French Spanish Basel Committee British Australian CGFS American German CPSS British German Financial Stab. Board Canadian Norwegian IAIS Australian Japanese IASB French Dutch IMF - French IOSCO Japanese British OECD - Mexican World Bank - American

Global Financial Policy Framework

First G20 Summits (Washington, London, Pittsburgh) – Strong involvement of principals

– “London-Pittsburgh Doctrine”: financial regulation is [for the most part] a global agenda “Global Problems Need Global Solutions”

– Significant breakthroughs Basel III, derivatives clearing, rating agencies, resolution regimes

Current Status – Partial divergence of priorities (European crisis)

– Weak coordination on high-profile political initiatives e.g. Volcker / Vickers / Liikanen / Moscovici

– Mostly delegation to FSB on more “technical” issues and implementation monitoring: e.g. Basel Committee; IASB (?)

– Limited progress on cross-border supervision/resolution

6

Financial Regionalism?

Financial policy integration in Europe – European Supervisory Authorities 2011 (EBA, ESMA, EIOPA)

– Single Supervisory Mechanism 2013-14 (hosted by ECB)

– “Single [regulatory] rulebook” + “single [supervisory] handbook”

– Question mark: UK vs. rest of EU

Asian initiatives – Chiang-Mai Initiative (M) / creation of AMRO (2011)

– ASEAN rhetoric on financial regulatory harmonization

Financial regulation in regional trade negotiations? – Trans Pacific Partnership / Transatlantic discussion?

7

Financial Deglobalization?

Financial infrastructure fragmentation? – Tangible (e.g. clearing houses) and intangible (e.g. CRAs, auditors)

Ring-fencing of global financial intermediaries – Impact on financial stability depends on stress scenarios

– No consensus on growth impact

Financial disintegration? – Eurozone crisis

– no clear global trend

Source: Milesi-Ferretti update on Lane & Milesi-Ferretti 2007 JIE 8

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Cross-Border Capital Flows as % of Global GDP

High-Growth Firms: A Comparison

FT Global 500 companies in each age category, based on the end-Sep. 2007 ranking.

Source: ‘The Demographics of Global Corporate Champions’, Bruegel Working Paper, July 2008 9

Different Challenges

United States – Focus on financial stability

– While keeping / strengthening financial development

Europe: multiple challenges – Financial development: non-bank finance, high-growth firms

– Financial stability: TBTF, banking concentration at national level

– Ongoing crisis management / future of Eurozone

Large emerging economies – Focus on financial development

– While keeping financial stability memories of late-1990s Asian crisis

10

Implications for Asia(ns)

Domestic financial reform / liberalisation – in most “large” countries including China and India

Interest in effective global financial governance – “West” can no longer be relied upon to maintain open global order

– Regional alternatives unlikely

– Liu Minkang article Oct 2010

Need to correct “institutional mismatch” – Political obstacles in both “West” and “Asia”

11

12

Thank You For Your Attention

Nicolas Véron +32 473 815 372 (Europe) / +1 202 550 0614 (U.S.)

n.veron@bruegel.org / nveron@piie.com

Bruegel: www.bruegel.org Peterson Institute: www.piie.com