Lawmakers’ Global Competitiveness Argument Is a Red Herring
The House Oversight and Investigations Subcommittee will hold an important hearing titled “The Growth of Financial Regulation and its Impact on International Competitiveness” today.
While the topic is certainly one that merits serious analysis and discussion, the biased nature of the memo to the members of the Committee on Financial Services raises the specter that U.S. financial institutions will flee abroad due to U.S. financial regulation.
The House memo states that the U.S. has “progressively implemented increasingly harsher regulations in accordance with mandates and authorities set out by the Dodd-Frank Act.” It argues that since U.S., Europe and Asia are not writing and implementing financial regulations uniformly, this “could place U.S. financial firms at a competitive disadvantage against their foreign counterparts and harm the U.S. economy.” The jobs that U.S. financial institutions create and keep in the U.S. are very important. Yet, politicians need to prove how, when and where it is that U.S. financial institutions might flee due to U.S. financial regulations.
If U.S. financial institutions think Europe and Asia are deregulated paradises, they will be sorely disappointed. The Asian and European members of the G20 all agreed to reform their financial institutions and OTC derivatives markets at the Pittsburgh G20 summit in 2009. Recent Bank for International Settlements data continue to show that Asian loan, securities and derivatives markets are much smaller than the U.S. and U.K. Many of them outright ban OTC derivatives if they are for speculative purposes as opposed to hedging. The largest Asian countries are all in varying degrees of implementing stricter bank capital requirements through adherence to Basel III, the international capital framework which the U.S. and Europe started to implement this year.
While is true that the U.K. and continental Europe lag the U.S. in a number of supervisory and bank resolution rules, by no means does this mean that they are not making significant strides in strengthening their financial regulation. Large financial institutions in the U.K. and continental Europe represent an even greater component of their GDP than do our banks of U.S. GDP. Hence, U.K. and European authorities and taxpayers are hardly interested in more financial institution failures than already occurred during the global financial crises and recent Eurozone one.
Moreover, Europe does not lag in all aspects of financial reform. In regulating rating agencies, foreign exchange markets and bank bonuses, for example, Europe is actually stricter than the U.S. Additionally, since European and U.K. banks started implementing Basel II in 2006, they also have more disclosures than do U.S. banks of the types of risks they take. Just last week, the European Commission proposed legislation to prohibit large banks’ from certain types of risky proprietary trading, a rule akin to the U.S.’s recently finalized Volcker Rule.
Importantly, as last week’s Symposium on Financial Stability and the Role of Central Banks at the Bundesbank demonstrated, European regulators are also thinking beyond bank regulation and starting to focus more on regulating shadow financial institutions.
Even if other countries ended up with some lighter rules, that should hardly be an excuse to weaken ours. Due to the differences in political systems, legal frameworks, supervisory structures, and where countries are in the credit cycle, it is impossible to expect global financial rules will be written, implemented, and enforced simultaneously and uniformly.
The law firm Davis Polk’s monthly Dodd-Frank Progress Report continues to show that many of the Dodd-Frank rules have not even been proposed, written or implemented. This is primarily because many of the relevant regulators lack necessary resources and because of significant lobbying against financial reform.
While Dodd-Frank is imperfect, it is important to remember that legislators passed it mainly because of the havoc that badly managed, undercapitalized U.S. financial institutions and their use of unregulated, opaque over-the-counter derivatives wreaked on the global economy. For risk managers, auditors and compliance officers who are starting to implement Dodd-Frank, there is no doubt that the challenge is daunting. However, implementation is critical to reform Wall Street and to protect consumers.
Finally, competitiveness does not mean competition. Competitiveness entails what public and private sector institutions do to raise the living standards of a country’s residents. The World Economic Forum’s Global Competitiveness Report, which analyzes twelve pillars contributing to a country’s competitiveness, unfortunately shows that the U.S. has been declining every year in competitiveness since the global financial crisis.
If the House of Representatives is really worried about the U.S.’s international competitiveness, it should analyze where we stand in eliminating “too big to fail” banks, the declining quality of our elementary and secondary education, affordable access to healthcare, the number of incarcerated people, improving our infrastructure and widening income inequality. Working on resolving these issues would be a better use of our legislators’ time and would go a long way to enhancing our international competitiveness.
Mayra Rodríguez Valladares is managing principal at MRV Associates, a New York-based capital markets and financial regulatory consulting and training firm. She is also a faculty member at Financial Markets World.