We’ve noticed multiple arguments lately about extraterritoriality in financial regulations – yesterday’s press had a handful of notable stories with the same theme. When regulators are arguing with other regulators about the breadth of their activities, you know something is amiss. We think that part of this is due to the globalization of financial markets and another part to regulators wanting to capture the entirety of the businesses they oversee. Whatever the root cause, here are some of the debates we are seeing:
Michel Barnier of the EU is upset with the US for wanting foreign banks to structure their US subsidiaries as locally regulated holding companies. According to Barnier, “The proposals are ‘a radical departure from the existing U.S. policy,’ and may undermine efforts to ensure that large banks can be safely wound down if they fail.” The standards “could spark a protectionist reaction from other jurisdictions, which could ultimately have a substantial negative impact on the global economic recovery.” These are ironic words coming from Barnier. Bloomberg has the full story here.
Meanwhile, in what amounts to a battle of tongues sticking out, Risk.net reports that “[The US] will not allow the [EU financial transaction tax] to happen. We will be very careful on how compensation is capped and regulated,” says the president and CEO of the US Chamber of Commerce Thomas Donohue.” He isn’t exactly a regulator but we are sure his thoughts are echoed in many other quarters.
The UK and Luxembourg are also angry about the impacts of the EU 11’s Financial Transactions Tax. The Wall Street Journal noted that “Luxembourg Finance Minister Luc Frieden said Monday his government is sympathetic to the UK’s opposition to a tax on financial transactions in the European Union, saying such a tax would risk hurting economic growth. The UK April 19 lodged a legal challenge to the financial transactions tax proposed by the European Commission because of concerns that it would hurt those countries that don’t sign up to it.” This argument has been echoed broadly by repo associations in particular. A legal challenge at the Court of Justice of the European Union suggests to us, in our non-lawyerly analysis, that the FTT would go against EU articles 63 and 64 on the free movement of capital. Our money is on the UK side to win this one.
The Swiss are peeved at the EU for protectionist financial regulatory policies (see Michel Barnier’s comments above). Reuters notes that “‘Switzerland is concerned by protectionist tendencies in international financial markets. MiFID is an example,’ Swiss state secretary for international financial matters, Michael Ambuehl, told the City Week conference in London. ‘It shouldn’t be the big players who set the rules and little players forced to comply. We need a level playing field for all countries,’ Ambuehl said.” Isn’t that what Basel III was supposed to be? Well yes, until individual countries started changing the rules to suit their historical preferences or national interests.
These running idea of these stories is that regulators are looking to either protect their financial stability and/or extend their powers inadvertently to other nations to ensure that their financial institutions abide by new rules. Globalization has hit not only banks but also the regulators that look after them. While a natural solution is harmonization of global financial regulations, we do not see this ever being the case, at least not in our professional lifetimes. Instead, we expect more of the same arguments as regulators hash out who has the right to supervise what, where and how.