Regulators struggle to balance global and local

Global banks merit global rules, but local banks can end up as collateral damage

Regulators and banks disagree on many things, but there seems to be one clear point of agreement: maintaining global regulatory co-ordination is important. At a press conference ahead of the July G20 summit, Financial Stability Board (FSB) chairman Mark Carney told reporters: “The message we will deliver on behalf of the FSB is to try to get across the progress that has been made – and it has been considerable, both in terms of the underlying reforms and also in terms of supervisory and regulatory co-operation – which does create an opportunity to, at a minimum, maintain this open system and potentially to enhance the openness and effectiveness of the global financial system, if that is what leaders want.”

But note the “if”. US Treasury Secretary Steve Mnuchin’s review of financial regulation, an earlier European Commission call for evidence and the questions raised by Brexit have all cast doubt on the consensus carefully built by the G20 since the 2009 Pittsburgh summit.

Global banks are keen to defend global regulation, as it suits their business model to avoid multiple and potentially conflicting compliance requirements in each jurisdiction. Yet some observers suggest policymakers are chasing a mirage.

“There has never been a truly level regulatory playing field with identical rules in every country and I doubt there ever will be,” says Paul Fisher, a former deputy head of the Bank of England’s Prudential Regulatory Authority. “Countries have always tweaked international regulatory agreements to reflect local pressures and different industry structures. Furthermore, there remain a great many important and relevant differences such as accounting, wider reporting rules [and] concepts of fiduciary duty.”

Where does this leave the FSB as it seeks to evaluate the G20 reforms? At the moment, several jurisdictions seem to be leaning towards a more proportionate approach. Cross-border banks need to be closely and consistently regulated across the world, especially given the dangerous impact of their failure.

By contrast, it is harder to justify such draconian monitoring of smaller banks, which can be safely allowed to fail and which operate in a single country. This is already the thrust of Mnuchin’s drive to lighten the load for US community banks, and there are similar pressures in the EU.

Global banks are keen to defend global regulation, as it suits their business model to avoid multiple and potentially conflicting compliance requirements in each jurisdiction

Then there is the question of how far to integrate developing markets into the global regulatory framework. Emerging-market regulators increasingly complain complex rules designed in response to governance failings in the US and Western Europe are constraining developing financial systems, which were not the source of the 2008 crisis. Again, a proportionate approach looks superficially appealing, but could be problematic for global banks operating in emerging markets. “If you are a retail bank, then you are playing in a local league, and then the level playing field requires similar treatment of subsidiaries of global banks and local players,” says Santiago Fernandez de Lis, head of regulation research at BBVA, a Spanish bank with large operations in Latin America and Turkey.

But advocates of tougher capital requirements for larger banks will point out they are at an advantage in other ways. Thanks to their high credit ratings and access to global markets, they enjoy lower borrowing costs. Economies of scale and large technology budgets can also keep operating costs lower at global banks compared with smaller peers.

The challenge for regulators is working out the calibration of all this. How much capital is too much? At what point does the level of capital begin to constrain lending to the real economy? At what point does a proportionate regulatory framework with higher capital burdens for systemic banks give an unfair advantage to smaller banks? Global and national rule-makers still have plenty of work on their hands.