Internationalizing Financial Regulation

Martin Wolf’s ideas for financial regulation:

First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.

Kevin Drum likes this a lot.

I’m not sure how much of this can stick in an industry where the product and the inputs (just money, really) can cross international borders so easily. Shut down some antics in London and they move to Zurich.

Relatedly, with a lot of regulatory ideas you need not only to write good rules down on a piece of paper in advance, you need to pull the trigger when the time comes. Say you resolve to “prevent off-balance-sheet activities” and write some rules. Then it’s 2017 and so-and-so at GiantBankCorp finds some kind of loophole. By 2019 everyone’s using this loophole. So some bureaucrat at Treasury says, “hey we should really rule that this amounts to an illegal off-balance-sheet activity and shut it down.” Next Tuesday there’s a story in Roll Call about how a group of GOP House members, joined by a bloc of moderate Democrats and even some liberals from the New York City area have written a letter to the Treasury Secretary warning that the proposed rule would reduce US financial services competitiveness. And you have to understand, this isn’t going to be a front page headline in Roll Call — this is 2019, not 2009, and the general public doesn’t care about banking regulation anymore — it’s buried in some backwater. The only people following the issue are financiers and lobbyist types. And, hey, the Secretary tells himself that the critics aren’t even wrong. Closing the loophole won’t shut the activity down, it’ll just ensure that the loopholes are being exploited out of the London office. Who does that help? What could go wrong?