Network News

X My Profile
View More Activity

Yes, America can regulate its banks

I've called capital requirements the "killer app" for financial regulation, but there's some question as to whether we can run the program. Some think that the international character of the financial market means that an international body -- probably the Basel Committee -- needs to make the call. That's been one of the explanations for the Dodd bill's vague language on capital requirements: There's no sense moving before Basel moves. But if that's true, then the importance of the FinReg proposals in Congress diminishes considerably. Someone else is making the most relevant decisions.

But conversations with financial experts over the past few days have convinced me that capital requirements can indeed be done domestically. "Nothing prevents the United States government from saying that if you want to operate in the country, your leverage needs to be at such-and-such levels," says Luigi Zingales, a professor of finance and entrepreneurship at Chicago University's Booth School of Business. "U.S. banks won’t be thrilled. And it's possible you’ll put companies at a comparative disadvantage. But you can do it."

Richard Carnell, a former assistant secretary for financial institutions at Treasury, is even more blunt. "That's self-serving nonsense," he says. "It's another way of deflecting accountability. So the regulators go into a back room at Basel and come up with something. Then when criticized, they say we’ll work to improve this, but they don’t have to take full responsibility." In fact, this Bloomberg article suggests that American regulators and banks don't always follow Basel regulations anyway, so it's hard to see that committee as a plausible final authority.

Insofar as there's a downside to setting your capital requirements domestically, it's that you might put your banks at a disadvantage if your regime is a lot stricter than everyone else's. Given the nature of our politics, that's probably not a very likely outcome. So we're back to arguing about the best way to regulate capital requirements, not whether it's possible for us to do so.

By Ezra Klein  |  March 30, 2010; 3:45 PM ET
Categories:  Financial Regulation  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: 'Race to the Top' actually forcing states to run
Next: The cost of reconciliation

Comments

@ ezra: Chicago University's Booth School of Business

This should be University of Chicago's Booth...as an alum I am sure that this is the way they refer to themselves. Chicago University could be mistaken for University of Il Chicago Campus, Chicago State University, etc.

Posted by: srw3 | March 30, 2010 3:52 PM | Report abuse

Not sure why the US can't regulate capital requirements for any firm operating in the US. Europe applies its antitrust regulation to US firms operating there. Famously, the US passed on the merger of two US-based firms, GE and Honeywell, and Europe blocked the deal. Their credible threat was to fine GE/Honeywell very heavily in Europe -- forcing the companies to consider whether they valued selling their products in Europe more than they valued merging. Why couldn't the US tell UBS or Credit Suisse that it will be fined heavily if it operates in the US without obeying US regulations on its world-wide capital structure. We may choose not to do that for any of a number of reasons, but unless treaties foreclose the option for the US, why couldn't we regulate capital structure for any financial firm operating here.

Posted by: Ken36 | March 30, 2010 4:19 PM | Report abuse

Ken36 - We can, but if we do many firms will just move overseas.

The Fin Reg issue is tricky. On the one hand we don't want to have to be bailing out financial institutions every 20 years (Savings and Loan in the 80s and then 2008s mass bailouts). On the other hand we don't want to over-regulate and kill innovation/force firms to move to tax havens.

I'm looking forward to more analysis on this issue.

Posted by: nisleib | March 30, 2010 4:33 PM | Report abuse

"Insofar as there's a downside to setting your capital requirements domestically, it's that you might put your banks at a disadvantage if your regime is a lot stricter than everyone else's."

Thus exposing one of capitalism's major weaknesses - its chronic inability to factor long term consequences into short term decisions. That "comparative disadvantage" would be purely over the short run, or more specifically until the next economic collapse. Then suddenly those high capital requirements become a goldmine.

Unless, of course, you set the expectations of corporate welfare at such a high level that there truly is no advantage to remaining financially solvent since you'll get bailed out anyway. But fortunately we haven't done anything that stupid have we!

Posted by: BigTunaTim | March 30, 2010 5:05 PM | Report abuse

The word "freedom" just isn't in your vocabulary, is it, Klein?

Posted by: msoja | March 30, 2010 5:22 PM | Report abuse

That's a "comparative disadvantage" I'm more than willing to take. Banks and financial institutions deserve, indeed have "earned", any restrictions we, the taxpayers who bailed them out, need in place before we can feel safe with their operations.

Posted by: onewing1 | March 30, 2010 8:11 PM | Report abuse

The freedom to destroy the economy by leveraging up to 50:1 and then taking the financial sector down when you fail? Nope.

Posted by: Ezra Klein | March 30, 2010 11:03 PM | Report abuse

'Ken36' talks sense - it does not matter whether it is an American bank or a foreign bank, if you want to do business in this country you must adhere to some specific capital requirements. What is that to do with putting American banks at disadvantage? HSBC, ING, Sumitomo, State Bank of India; all do business in USA. All of them equally have to submit to the same norms as like Citi and Wells Fargo.

I think this is a common sense people are forgetting on purpose because these banks do not want to do have regulations.

Fed government gave loan guarantees of $1.2 Billion to Japanese Automaker Nissan so that it can build car battery plant in USA (I think in Tennessee). How does that work? As long as the employment is here and customers served are predominantly here, it serves American purposes. Hence compliance to Americans rules.

This Basel stuff - that is another hogwash. Basel Committee recommended 'counter cyclical' capital recommendations (I think they only talked but I guess might not have formally recommended) where in 'boom' a bank needs to put more reserve and in 'recession' less. I suppose Dodd talked for a while about that. I am not sure if that is making into rules. But point is, so many of Basel things do not get followed and applied.

And since when this Congress which is apprehensive about even Russian 'opinion' about American Missile Defense system in the preamble of START treaty (as an affront on sovereignty) is ready to 'concede' American sovereignty to Basel Committee when it comes to Bank regulations? We got to be careful about those who are making this noise and are those folks beholden to Banking lobby or not.

Posted by: umesh409 | March 31, 2010 12:56 AM | Report abuse

Said above.

Ezra, you are absolutely killing me. Thats the second day in a row that you have written "Chicago University". Its the University of Chicago and its one of the best universities in the world (I'm an alum). If you want to cite a professor in a field similar to economics or business, then you really need to get it right, because they have the best economics department in the world. I cringe every time i hear that and you lose just a little respect from me every time you do it.

Posted by: powerscf | March 31, 2010 2:03 AM | Report abuse

It would be interesting to see how many people argue against bank regulation because "we have to wait for Basel," are also stridently against any diminution of American sovereignty in other areas, such as international law.

Posted by: dlk117561 | March 31, 2010 1:37 PM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company