Download Global Financial Regulation A recent addition to the global

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
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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
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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
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