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Not All Financial Regulation Is Global Nicolas Véron Senior Fellow, Bruegel Visiting Fellow, Peterson Institute for International Economics Milan – Bocconi University, December 13, 2010 Background paper: ‘Not All Financial Regulation Is Global’ Stéphane Rottier & Nicolas Véron, Bruegel Policy Brief 2010/07, Sept. 2010 Also published as Peterson Institute Policy Brief PB10-22, Sept. 2010 1 Highlights The crisis transforms global financial regulatory dynamics – Financial reregulation (in the West) – Financial multipolarity (not created by crisis, but accelerated) This makes global convergence generally more difficult Consequence: need for a more focused global agenda – ‘‘All politics is local; regulation is politics; therefore not all financial regulation can be global’’ Clarifications – Not about the entire financial reform agenda – EU a special case 2 Global Financial Regulation A recent addition to the global economic policy agenda – 1970s-1980s: sector-specific initiatives – 1997-98 Asian Crisis: international macroeconomic stability – Late 2008: top priority on the leaders’ agenda A comparatively immature policy area – Complex, fragmented, jargon-ridden – Underdeveloped analytical basis – Capture by private interests – Legitimacy/accountability of key standards-setters 3 Two Major Trends Financial Reregulation – In developed countries: stability framework tested by the crisis – New constraints on financial firms – still ongoing – Largely driven by local financial/political specificities Financial Multipolarity – Centre of gravity of global finance is moving eastwards – Differences in financial development – Rebalancing of global public institutions 4 Financial Deglobalization? Global Cross-Border Capital Flows, 1975-2009 1000 900 800 700 600 Capital Inflows 500 % GDP 400 300 200 100 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 0 Source: Gian Maria Milesi-Ferretti / IMF, External wealth of Nations Mark II database (update of Lane and Milesi-Ferretti 2007 JIE) 5 Global Banks: Shifting Center of Gravity Aggregate Market Value of Top 100 Listed Banks by Location of HQ Assets of Top 100 Listed Banks, by Location of HQ 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% United States Europe Emerging Economies Japan Australia + Canada United States Europe Emerging Economies Japan 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 oct.-09 janv.-09 avr.-08 juil.-07 oct.-06 janv.-06 avr.-05 juil.-04 oct.-03 janv.-03 avr.-02 0% juil.-01 0% oct.-00 10% janv.-00 10% 2000 20% 20% Australia + Canada Shares of aggregate market value (left) and of aggregate assets (right) of top 100 global listed banks at each date, by region of headquarters. Source: FT Global 500 rankings, Datastream, author’s calculations 6 Global Banks: Restructuring 2007-2010 Europe Market Cap. $bn mid-07 mid-10 1 HSBC UK 215 161 -25% 2 UBS CH 126 51 -59% 3 RBS UK 120 36 -70% 4 Santander ES 116 88 -24% 5 BNP Paribas FR 111 65 -41% 6 ING NL 98 29 -70% 7 UniCredit IT 93 43 -53% 8 Barclays UK 91 49 -47% 9 ABN Amro NL 89 N.S. 10 Intesa Sanpaolo IT 88 34 -62% 11 BBVA ES 87 40 -55% 12 Credit Suisse CH 87 45 -48% 13 Societe Generale FR 86 31 -64% 14 Deutsche Bank DE 76 36 -54% 15 HBOS UK 74 N.S. 16 Credit Agricole FR 67 25 -62% 17 Lloyds UK 63 55 -13% 18 Fortis BE 56 N.S. 19 KBC Group BE 49 14 -72% 20 StanChart UK 46 51 +11% Total 1839 852 -54% Major restructuring Nationalization United States Market Cap. $bn mid-07 mid-10 Citigroup US 254 109 -57% Bank of America US 217 144 -34% JP Morgan Chase US 166 146 -12% Wells Fargo US 117 133 +13% Wachovia US 98 N.S. Goldman Sachs US 89 68 -24% Morgan Stanley US 88 32 -63% American Express US 73 48 -34% Merrill Lynch US 73 N.S. Fannie Mae US 64 0 -100% U. S. Bancorp US 57 43 -25% Freddie Mac US 42 0 -100% Lehman Brothers US 40 0 -100% Washington Mutual US 38 0 -100% Franklin Resources US 33 20 -41% Capital One Fin. US 33 18 -44% Bank of New York US 31 30 -5% Suntrust Banks US 31 12 -62% Charles Schwab US 26 17 -34% PNC Fin. Services US 25 30 +20% Rest of the World Total Total 1593 849 -47% Acquisition Bankruptcy/receivership Market Cap. $bn mid-07 mid-10 ICBC CN 211 211 +0% Bank of China CN 155 128 -18% China Constr. Bank CN 155 189 +22% Mitsubishi UFJ JP 120 65 -46% Sberbank RU 84 55 -35% Mizuho JP 80 26 -68% Sumitomo Mitsui JP 72 41 -44% Royal Bk of Canada CA 68 68 +0% BoCom CN 62 55 -12% Commonwealth Bk Austr. AU 61 64 +4% National Australia Bk AU 57 42 -27% Banco Itau BR 52 74 +43% China Citic Bank CN 51 30 -41% Bradesco BR 50 49 -2% Toronto Dominion CA 49 57 +15% Bank of Nova Scotia CA 48 48 -1% China Merchants CN 47 43 -8% ANZ Banking AU 46 46 +2% Westpac Banking AU 40 53 +33% Nomura JP 38 21 -46% 1546 1363 -12% 7 Global Financial Centers: A Typology 8 A Global Subsidiarity Principle Global harmonization not possible on all aspects – And not necessary: ‘‘biodiversity’’ argument Case of banking regulation – Basel 3: ‘‘Swiss finish’’, etc. – SIFIs: cross-border level playing field now sought primarily for ‘‘Global SIFIs’’ ‘Domestic SIFIs’ (e.g. Lloyds, Japan Post, ICBC…) are a matter for national (or EU) level ‘Toolbox’ leaves many options to individual jurisdictions Capital Markets: strong economic argument for global integration – Requires global initiatives to counter fragmentation trend 9 Largest Banks’ Internationalization Profiles Geographical distribution of top banks’ global revenue 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EU (Top 19) Home country Canada (Top 3) US (Top 9) Japan (Top 4) Rest of Europe (EU banks) Brazil (Top 4) India (Top 3) US (Canadian banks) China (Top 5) Rest of World Average geographical distribution of 2009 revenue of largest listed banks in each region by 2009 assets. Source: corporate reports, authors’ calculations 10 Global Institution-Building Soft coordination no longer works well (if it ever did) Stronger global institutions needed to do the job – Increased requirements for clarity of purpose, institutional capability, accountability – Examples: IMF reform; IASB governance; Basel institutions? Need for new specialized institutions? – To be avoided if possible – But some tasks may not be suitable for existing bodies Future of the G20 process – Permanent secretariat (Sarkozy speech August)? – Transformation of FSB (Seoul declaration)? 11 Hard vs Soft Processes Scoring of 39 financial regulation action items in G20 declaration of 15/11/2008, sorted by type of lead institution(s) in charge 12 Global Financial Monitoring Need for dramatically more + better public data – At firm level / country level Corporate financial reporting – Accounting standards: how to keep the dream alive? – Audit firms: how to ensure consistency? – Financial risk disclosures National / public reporting – Aggregate information on financial systems – Cross-border linkages – Implementation of agreed standards 13 Capital Markets Infrastructure Avoid fragmentation along national or currency borders – Clearing platforms – Rating agencies – Securities regulation Possible remedies – Stronger IOSCO standard-setting – International supervision? e.g. clearing platforms: explicit burden-sharing agreement? 14 Global Market Intermediaries Challenges to level playing field – Universal banks – Home-country guarantees favour big-country players More debate needed – FSB focus on G-SIFIs a helpful shift – A role for competition policy? 15 15 Where Can Leadership Come From? Private sector – Negative public image, lower policy profile United States – Impact of economic downturn / mid-term elections – Inward focus increasingly likely Emerging economies – Domestic focus; Still asking for differentiated treatment (e.g. Korea) – No willingness/readiness to take baton of global leadership European Union – Strategy of ‘‘harmonize globally to harmonize the EU’’ becomes less effective – Ability to overcome internal divisions? – What driving vision? 16 Thank You For Your Attention Nicolas Véron +32 473 815 372 (Europe) / +1 202 550 0614 (U.S.) [email protected] Bruegel: www.bruegel.org Peterson Institute for International Economics: www.piie.com 17