Not All Financial Regulation Is Global

1. 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

2. 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

3. 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

4. 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

5. Financial Deglobalization? Source: Gian Maria Milesi-Ferretti / IMF, External wealth of Nations Mark II database (update of Lane and Milesi-Ferretti 2007 JIE)

6. Global Banks: Shifting Center of Gravity 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

7. Global Banks: Restructuring 2007-2010

8. Global Financial Centers: A Typology

9. 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

10. Largest Banks’ Internationalization Profiles Geographical distribution of top banks’ global revenue Averagegeographical distribution of 2009 revenue of largestlistedbanks in eachregion by 2009 assets. Source: corporate reports, authors’ calculations

11. Global Institution-Building • Soft coordination no longer workswell (if iteverdid) • Stronger global institutions needed to do the job • Increasedrequirements for clarity of purpose, institutionalcapability, accountability • Examples: IMF reform; IASB governance; Basel institutions? • Need for new specialized institutions? • To beavoided if possible • But sometasksmay not besuitable for existing bodies • Future of the G20 process • Permanent secretariat (Sarkozy speech August)? • Transformation of FSB (Seoul declaration)?

12. Hard vs Soft Processes Scoring of 39 financialregulation action items in G20 declaration of 15/11/2008, sorted by type of lead institution(s) in charge 12

13. 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

14. 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?

15. Global MarketIntermediaries • Challenges to levelplayingfield • Universal banks • Home-country guaranteesfavourbig-country players • More debateneeded • FSB focus on G-SIFIs a helpful shift • A role for competitionpolicy? 15

16. 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?

17. Thank You For Your Attention Nicolas Véron +32 473 815 372 (Europe) / +1 202 550 0614 (U.S.) n.veron@bruegel.org Bruegel: www.bruegel.org Peterson Institute for International Economics: www.piie.com