Domestic priorities threaten global standards

What does it mean to be courageous, in the context of regulation? Sheila Bair, former chairwoman of the Federal Deposit Insurance Corporation in the US, uses the term in this month's cover story, to describe Federal Reserve proposals that would regulate the local offshoots of foreign banks as though they were standalone entities.

It's brave because it's a break with tradition. Usually, banks are regulated on a global, consolidated basis, allowing capital and liquidity to be managed at the group level. But that assumes parental resources will always be enough to support local entities - and will always be available. The crisis showed this may not be a safe assumption.

Regulators outside the US recognise these flaws as well, and some are quietly pressing for the local arms of global banks to keep more capital and liquidity close at hand. In essence, the Fed is doing publicly what others are edging towards privately. That's brave, too.

A similar fearlessness is being displayed by the Commodity Futures Trading Commission - it wants to ensure risks taken by US banks and other US entities overseas do not hurt the economy and taxpayers back home. As a result, it has proposed that all trades involving a US person - no matter where the counterparties are based - be subject to Dodd-Frank Act rules.

And the US doesn't have a lock on courage. In Europe, legislators have boldly veered away from the Basel III script to provide an exemption from the credit valuation adjustment (CVA) charge for trades involving corporates, sovereigns and pension funds.

Regulators are bound to look to their domestic economy, markets and institutions first - they answer to their own politicians, not to global standards. So courage has nothing to do with it

In each of these cases, a local regulator has looked at what is best for its own market, its own country and has dared to tear up the script.

That's one way to see it. An alternative view is that regulators are bound to look to their domestic economy, markets and institutions first - they answer to their own politicians, not to global standards. So courage has nothing to do with it. Instead, what we are witnessing is a pragmatic acceptance that - when the next crisis hits - regulators will be judged on their ability to defend national priorities, rather than the extent to which they have supported cross-border banking.

So while politicians and policy-makers are publicly calling for co-operation, harmonisation and consistency, banks and regulators alike are privately voicing more cynical views. As one banker puts it in this month's issue: "Regulatory co-operation is a joke. No matter how many nice words supervisors say about the concept, we all know it is not happening and is not going to happen".