Cross-border regulation of banks is proving increasingly difficult, despite the call for global regulation of the financial system. 

It has become a mantra that the global financial system needs global regulation. The Basel Committee on Banking Supervision, Financial Stability Board (FSB) and International Organisation of Securities Commissions, to name but three, are all keen to oblige.

But as the juggernaut post-crisis regulatory agenda rolls on, genuinely global regulation is proving increasingly difficult. There are clear examples where it is essential. Cross-border financial institutions need cross-border supervision, as the destruction visited on US insurer AIG in 2008 by its Swiss financial guarantees division made abundantly clear. Derivatives markets are naturally global, and regulators on both sides of the Atlantic acknowledge the need for some kind of mutual recognition – although a comprehensive deal has yet to arrive.

However, national financial sectors are at very different stages of development and some attempts at global standards just do not seem to make sense, especially for smaller or more domestically focused institutions. The Basel liquidity ratios are intended to avoid banks, such as Northern Rock, in the most developed countries becoming too dependent on short-term wholesale markets. But they may disproportionately affect emerging markets that have few liquid assets. Paradoxically, banks in these countries are usually less reliant on wholesale funding in the first place.

And the latest question for which the FSB has decided there must be a global answer is on bank resolution. The key is apparently for banks to issue unsecured debt that can be bailed in to recapitalise the bank in distress.

China’s banks are certainly large – four of the top 10 in the world, as we noted in our July edition. But the trouble is that Chinese regulators have long imposed restrictions on loan-to-deposit ratios. As a result, those four banks all have loan-to-deposit ratios well below 80%. Why would they want to issue vast quantities of debt they do not need to fund themselves, purely to prepare for the remote possibility of resolution?

Of course, global banks often argue for a level playing field. But some of the countries that steered the best course through the crisis – such as Canada or Israel – are those that focused more on the idiosyncrasies of their own banks than on what other countries were doing. Israel imposed stringent restrictions to cool an overheating domestic mortgage market. Seven years on from the start of the crisis, the UK – whose banks were perhaps the loudest advocates of the level playing field argument – is now looking at similar macroprudential measures. The drive for global regulation should not lose sight of the fact that there is no regulatory substitute for detailed local knowledge.

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