The U.S. and Europe: Two Models, Two Regulations

While financial institutions prepare their drafts for the Basel Committee on Banking Supervision this Friday, the issue, beyond technique, is above all a political battle. This is true for both sides of the Atlantic, but also on each continent. The only hope is that the politicians meeting next week in Washington and in June in Toronto won’t let down their guard.

One year after London’s G-20 summit on the financial crisis, the managing director of the IMF, Dominique Strauss-Kahn, lamented a few days ago that the world “is in the process of forgetting the lesson on the need for a global response”* to financial regulation. But the relentless work of the regulators since April 2009, manifested notably in the framework of the Basel Committee that brings together the G-20 countries, is evidence to the contrary. The politicians’ desire to succeed and their exasperation regarding bankers who, they assess, obtained favorable results in 2009 thanks to resources that were practically gifted to them by central banks, also adds a sting. And yet, the resistance is palpable. Americans have made a lot of noise but have done very little to move forward on regulation. Europeans, in spite of their good will, are having trouble agreeing with one another.

Behind the question of technique, financial regulation reform is first and foremost a political subject, even a philosophical subject. Though everyone may agree on the necessity of implementing a framework aimed at supporting solid growth, there are two opposing models to obtain it. The Anglo-Saxon economy is central, insuring three-quarters of the financial market. The Old Continent uses banks as intermediaries that finance 80 percent of the economy. Hoping for a common system of regulation is akin to trying to square a circle.

From this point of view, the Americans have shown themselves extremely pragmatic regarding their own interests. Thus, they are much more advanced than Europeans in their market infrastructure, especially clearinghouses. But financial institutions do not interest them — a fact that doesn’t prevent them from demanding that Europeans enact fiscal constraints similar to their own, like the “leverage ratio,” which does not exist in Europe.

The construction site for building bank capital, which so worries banks, is the core of the reactor. This is because the continentals, for political reasons, have applied differently a rule that should have been applied in the same way by all G-20 countries, a rule laid down by the Basel Committee. The committee established rules solely for systemic establishments; in other words, for big banks. At least this is how the Americans understand it. In Europe, on the other hand, Brussels decided to implement the recommendations of Basel into a directive, imposing them on all establishments regardless of size.

But why, then, are Americans still not applying Basel 2? Again, politics takes the lead. Seated on the Basel Committee are five Americans, one of whom represents the Fed, and the other the FDIC, a deposit insurance corporation. The Fed has always been favorable to Basel 2, while the FDIC, notably through the voice of its supervisor Sheila Blair, is violently opposed. She relentlessly rallies to prevent any attempt at applying Basel 2. Even if a measure had the good fortune to please Ms. Blair, it would still need to convince Congress, which is rather volatile, to adopt it. Today, no one believes in a vote that could fetter the development of the income of American banks.

This imbroglio is not particular to America. On this side of the Atlantic only a handful of countries (among them France, Great Britain, Germany, and sometimes Italy, Spain and the Netherlands) are rallying around Basel. The other countries no longer have a national financial market, or even national banks for that matter. They don’t feel that they are players in the proceedings relating to new regulation. As noted by an observer, “in Europe today, rallying these countries is like stirring a barrel of molasses. In any case, they have already given everything up to the Anglo-Saxons.”

In spite of strong resistance, the Basel Committee, which could have accomplished a titanic task between April 2009 and its draft submission to the G-20 in Seoul at the end of the year, can count on the pressure of politicians. The weight of public opinion is on their shoulders — a public that hopes the lessons of the crisis have really been learned.

*Quotation could not be verified.