International disagreements on issues such as central clearing house margins and bank bail-in leave national regulators weaker, not stronger.

In September 2009, the governments of the G20 nations met in Pittsburgh and agreed a wide-ranging programme of reforms to build a safer financial system. Six years later, the multilateral body charged with managing this process, the Financial Stability Board (FSB), is on the verge of completing its task. But at the same time, the process seems to be veering frustratingly off-track.

As the FSB met in plenary session this September, there was still wrangling over how to address the problem of too-big-to-fail banks. One of the central elements of the board’s ambitious goal is total loss-absorbing capacity (TLAC), the layer of liabilities that can be bailed in or written off to recapitalise a distressed bank when it enters resolution.

To build trust between the home and host supervisors of cross-border banking groups, the FSB proposed pre-positioning: requiring material subsidiaries to hold locally between 75% and 90% of what their TLAC requirement would be as standalone banks. But this has triggered concern from banks that are structured to be resolved as several separate entities rather than a single group at holding company level. The more material subsidiaries a banking group has, the higher its TLAC requirement would be.

The disagreement has a geographical edge, because the largest US banks use a holding company structure, whereas many European banking groups are structured as federations of national operating companies. So a rumoured concession from the FSB to cap the cumulative TLAC requirement for a looser group will please the Europeans. But the Americans are apparently unimpressed, and the industry fears US legislators will therefore gold-plate the FSB’s global TLAC standard.

Meanwhile, the US and EU are still arguing over another key element of the 2009 Pittsburgh agenda: moving over-the-counter derivatives onto central clearing counterparties (CCPs) to reduce the risk of contagion among banks. Here again, the dispute might seem esoteric. EU CCPs collect enough margin to cover two days’ losses, while netting client exposures. US CCPs collect margin to cover one day’s loss, but calculated on gross client exposures. Most market participants regard either method of calculating margin requirements as robust.

Left to their own devices, regulators can thrash out a technical compromise. Instead, these issues have become politicised. Any concession to ensure regulations line up across borders is increasingly painted as a surrender of national sovereignty. But that horse left the stable long ago. The largest banking groups are global. The failure to agree a global set of rules leaves national regulators weaker, not stronger.

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