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Not All Financial Regulation Is Global

Nicolas Véron

Senior Fellow, Bruegel

Visiting Fellow, Peterson Institute for International Economics

Milan – Bocconi University, December 13, 2010

Background paper: ‘Not All Financial Regulation Is Global’

Stéphane Rottier & Nicolas Véron, Bruegel Policy Brief 2010/07, Sept. 2010

Also published as Peterson Institute Policy Brief PB10-22, Sept. 2010

Highlights

The crisis transforms global financial regulatory dynamics

– Financial reregulation (in the West)

– Financial multipolarity (not created by crisis, but accelerated)

This makes global convergence generally more difficult

Consequence: need for a more focused global agenda

– ‘‘All politics is local; regulation is politics; therefore not all financial regulation can be global’’

Clarifications

– Not about the entire financial reform agenda

– EU a special case

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Global Financial Regulation

A recent addition to the global economic policy agenda

– 1970s-1980s: sector-specific initiatives

– 1997-98 Asian Crisis: international macroeconomic stability

– Late 2008: top priority on the leaders’ agenda

A comparatively immature policy area

– Complex, fragmented, jargon-ridden

– Underdeveloped analytical basis

– Capture by private interests

– Legitimacy/accountability of key standards-setters

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Two Major Trends

Financial Reregulation

– In developed countries: stability framework tested by the crisis

– New constraints on financial firms – still ongoing

– Largely driven by local financial/political specificities

Financial Multipolarity

– Centre of gravity of global finance is moving eastwards

– Differences in financial development

– Rebalancing of global public institutions

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Financial Deglobalization?

5Source: Gian Maria Milesi-Ferretti / IMF, External wealth of Nations Mark II database (update of Lane and Milesi-Ferretti 2007 JIE)

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Capital Inflows

% GDP

Global Cross-Border Capital Flows, 1975-2009

Global Banks: Shifting Center of Gravity

6Shares of aggregate market value (left) and of aggregate assets (right) of top 100 global listed banks at each date, by region of headquarters. Source: FT Global 500 rankings, Datastream, author’s calculations

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United States Europe

Emerging Economies Japan

Australia + Canada

Assets of Top 100 Listed Banks, by Location of HQ

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United States Europe

Emerging Economies Japan

Australia + Canada

Aggregate Market Value of Top 100 Listed Banks by Location of HQ

Global Banks: Restructuring 2007-2010

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Europe United States Rest of the Worldmid-07 mid-10 mid-07 mid-10 mid-07 mid-10

1 HSBC UK 215 161 -25% Citigroup US 254 109 -57% ICBC CN 211 211 +0%2 UBS CH 126 51 -59% Bank of America US 217 144 -34% Bank of China CN 155 128 -18%3 RBS UK 120 36 -70% JP Morgan Chase US 166 146 -12% China Constr. Bank CN 155 189 +22%4 Santander ES 116 88 -24% Wells Fargo US 117 133 +13% Mitsubishi UFJ JP 120 65 -46%5 BNP Paribas FR 111 65 -41% Wachovia US 98 N.S. Sberbank RU 84 55 -35%6 ING NL 98 29 -70% Goldman Sachs US 89 68 -24% Mizuho JP 80 26 -68%7 UniCredit IT 93 43 -53% Morgan Stanley US 88 32 -63% Sumitomo Mitsui JP 72 41 -44%8 Barclays UK 91 49 -47% American Express US 73 48 -34% Royal Bk of Canada CA 68 68 +0%9 ABN Amro NL 89 N.S. Merrill Lynch US 73 N.S. BoCom CN 62 55 -12%

10 Intesa Sanpaolo IT 88 34 -62% Fannie Mae US 64 0 -100% Commonwealth Bk Austr. AU 61 64 +4%11 BBVA ES 87 40 -55% U. S. Bancorp US 57 43 -25% National Australia Bk AU 57 42 -27%12 Credit Suisse CH 87 45 -48% Freddie Mac US 42 0 -100% Banco Itau BR 52 74 +43%13 Societe Generale FR 86 31 -64% Lehman Brothers US 40 0 -100% China Citic Bank CN 51 30 -41%14 Deutsche Bank DE 76 36 -54% Washington Mutual US 38 0 -100% Bradesco BR 50 49 -2%15 HBOS UK 74 N.S. Franklin Resources US 33 20 -41% Toronto Dominion CA 49 57 +15%16 Credit Agricole FR 67 25 -62% Capital One Fin. US 33 18 -44% Bank of Nova Scotia CA 48 48 -1%17 Lloyds UK 63 55 -13% Bank of New York US 31 30 -5% China Merchants CN 47 43 -8%18 Fortis BE 56 N.S. Suntrust Banks US 31 12 -62% ANZ Banking AU 46 46 +2%19 KBC Group BE 49 14 -72% Charles Schwab US 26 17 -34% Westpac Banking AU 40 53 +33%20 StanChart UK 46 51 +11% PNC Fin. Services US 25 30 +20% Nomura JP 38 21 -46%

Total 1839 852 -54% Total 1593 849 -47% Total 1546 1363 -12%

Major restructuring AcquisitionNationalization Bankruptcy/receivership

Market Cap. $bn Market Cap. $bn Market Cap. $bn

Global Financial Centers: A Typology

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A Global Subsidiarity Principle

Global harmonization not possible on all aspects

– And not necessary: ‘‘biodiversity’’ argument

Case of banking regulation

– Basel 3: ‘‘Swiss finish’’, etc.

– SIFIs: cross-border level playing field now sought primarily for ‘‘Global SIFIs’’

‘Domestic SIFIs’ (e.g. Lloyds, Japan Post, ICBC…) are a matter for national (or EU) level

‘Toolbox’ leaves many options to individual jurisdictions

Capital Markets: strong economic argument for global integration

– Requires global initiatives to counter fragmentation trend

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Largest Banks’ Internationalization Profiles

Geographical distribution of top banks’ global revenue

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Average geographical distribution of 2009 revenue of largest listed banks in each region by 2009 assets. Source: corporate reports, authors’ calculations

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100%

EU (Top 19)

Canada (Top 3)

US (Top 9)

Japan (Top 4)

Brazil (Top 4)

India (Top 3)

China (Top 5)

Home country Rest of Europe (EU banks) US (Canadian banks) Rest of World

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Global Institution-Building

Soft coordination no longer works well (if it ever did)

Stronger global institutions needed to do the job

– Increased requirements for clarity of purpose, institutional capability, accountability

– Examples: IMF reform; IASB governance; Basel institutions?

Need for new specialized institutions?

– To be avoided if possible

– But some tasks may not be suitable for existing bodies

Future of the G20 process

– Permanent secretariat (Sarkozy speech August)?

– Transformation of FSB (Seoul declaration)?

1212Scoring of 39 financial regulation action items in G20 declaration of 15/11/2008, sorted by type of lead institution(s) in charge

Hard vs Soft Processes

Global Financial Monitoring

Need for dramatically more + better public data

– At firm level / country level

Corporate financial reporting

– Accounting standards: how to keep the dream alive?

– Audit firms: how to ensure consistency?

– Financial risk disclosures

National / public reporting

– Aggregate information on financial systems

– Cross-border linkages

– Implementation of agreed standards

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Capital Markets Infrastructure

Avoid fragmentation along national or currency borders

– Clearing platforms

– Rating agencies

– Securities regulation

Possible remedies

– Stronger IOSCO standard-setting

– International supervision? e.g. clearing platforms: explicit burden-sharing agreement?

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Global Market Intermediaries

Challenges to level playing field

– Universal banks

– Home-country guarantees favour big-country players

More debate needed

– FSB focus on G-SIFIs a helpful shift

– A role for competition policy?

Where Can Leadership Come From?

Private sector

– Negative public image, lower policy profile

United States

– Impact of economic downturn / mid-term elections

– Inward focus increasingly likely

Emerging economies

– Domestic focus; Still asking for differentiated treatment (e.g. Korea)

– No willingness/readiness to take baton of global leadership

European Union

– Strategy of ‘‘harmonize globally to harmonize the EU’’ becomes less effective

– Ability to overcome internal divisions?

– What driving vision?

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Thank You For Your Attention

Nicolas Véron

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

n.veron@bruegel.org

Bruegel: www.bruegel.org

Peterson Institute for International Economics: www.piie.com