By Clive Crook
Published: March 21 2010 19:19
With the US in convulsions over healthcare, Barack Obama devoted his regular weekend broadcast to a different subject: financial reform. It was a surprising choice, but give the president credit for recognising the importance of the issue.
A study by Phillip Swagel of Georgetown University estimates the cost for the US of the recession so far – over and above the losses of an ordinary slowdown – at $650bn in output and $230bn in fiscal outlays. The tab is still running, since the economy remains far off track.
In other words, avoiding the Great Recession would have paid for universal health insurance with money to spare. But it was not avoided. Starting from here, with long-term public finances stretched to the limit, the US cannot afford another such calamity.
Current proposals for financial reform inspire little confidence. The administration has published a blueprint; the House passed a bill along the same lines; and last week the Senate banking committee produced a third, similar plan. These designs are not stupid or incompetent but they are incomplete. They focus on form, not substance, and they neglect the international aspect. The failings are no accident.
In his talk, Mr Obama attacked the industry lobbies that are trying to shape the new rules. He is correct. Special interests are too influential. Their influence would cease if the administration and Congress stopped listening, but they never do. They prefer to do business and complain. Much as he promised to change this, Mr Obama is no different.
This alliance of business and government is especially pernicious in finance. The problem is not just that specific rules – higher bank capital requirements, for instance – threaten profits and are therefore opposed. It is that all governments see themselves as partners of their industries in world competition. Regulators seek not a level playing field but one tilted to their own groups’ advantage. This is not a hidden bias. It is proudly advertised. A government that did less than stand up for its own companies would be seen as failing in its duty.
In finance, a footloose industry, this striving for regulatory advantage undermines rules imposed by other countries. Financial regulation will underperform until regulators work more closely with counterparts abroad than with those they police.
A consensus is emerging on the needed elements of regulatory reform, though not on the international co-operation necessary to make them work. In the US, attention has focused on domestic preoccupations and above all on dividing the regulatory terrain: which regulator is in charge of what and who reports to whom.
The most discussed topic has been consumer protection. This quintessentially domestic issue gave rise to a classic turf fight. The various blueprints call for a new regulator. A lot of attention has been paid to this body’s reporting lines. The principles to guide it have been little discussed. Will payday loans be banned? Will minimum deposits be required for mortgages? Questions such as these will be left to the regulator’s discretion.
Most of the proposed US legislation is concerned with architecture – how many agencies, and what will they do? The plans do a lot of shuffling among new and existing bodies but fail to streamline the system.
Even for domestic purposes, consolidation is important. The US has too many regulators pulling in different directions, which invites participants to shop for lax regulation. Internationally, regulatory arbitrage is an even greater hazard – witness Lehman and Repo 105. The best argument for a simple structure is that this would help national regulators to work together. This idea has had little or no influence on US plans.
Pieces of the needed reforms are reasonably clear. They include higher capital and liquidity requirements, linked to size and to the credit cycle. Orderly resolution arrangements must be designed for non-bank financial groups as well as banks. There is growing support for requiring contingent capital (bonds that convert to equity under stress) and subordinated debt (increasing creditors’ exposure to writedowns). These should strengthen market discipline over risk-taking.
Such measures will meet resistance, especially if done unilaterally. The industry will cry competitive disadvantage. International co-operation is therefore essential. But discussions among regulators are moving slowly. While America’s turf fights remain unresolved, it is not even clear who should speak for US regulators.
Some say these methods are doomed to fail anyway – they would always be stopped or evaded. Only one thing matters: breaking up the biggest financial groups so that they are no longer too big to fail. Size is an issue but this is a misguided argument. The same finance/ government alliance that resists, say, higher capital requirements will resist aggressive size limits. In either case, resistance must be overcome.
More important, preventing “too big to fail” is not enough. Many small banks exposed to the same risk may be as dangerous as a single large bank, and even harder to resolve. Lehman’s collapse froze credit markets not because Lehman was so big but because so many financial groups- big and small alike – were interconnected, overleveraged and exposed to risks nobody understood.
Better regulation is needed. But if this cannot be done internationally, it cannot be done at all.
Copyright The Financial Times Limited 2010.
0 comments:
Publicar un comentario