Financial Reform: The International Factor

Financial Reform in the US faces formidable pitfalls domestically with a Nope-A-Dope Republican Senate  invigorated by the Supreme Court “no holds barred to campaign funding”  decision. Despite being in a minority position, the Republicans can stall and effectively defeat any financial reforms that don’t meet their requirements – and those are still aligned pretty closely with the financial community despite the latter’s  great unpopularity.

But there are also serious international obstacles to financial reform. Many reforms will not work if they are not implemented fairly uniformly by all the major international financial players. Take for example, the Too Big Too Fail banks. The British are spearheading a drive to establish what the banks have failed to do – an insurance fund against failure/bankruptcy so that governments would not have to bail them out with taxpayers money. It sounds like the very terms and conditions the banks would put on their own customers – pay for the insurance against customer going belly up.  But the problem is that if one or two major countries opt out, this creates an unfair playing field with the uninsured banks having the competitive advantage of lower operating costs.

And of course that is precisely the problem arising in the International Bank Insurance Proposal. The  Canadian government, whose 6 major banks are all Too Big Too Fail in size, is  opposed to the Bank Insurance fund.  Canadian Finance Minister Jim Flaherty says why do we need such a measure – our banks and their regulations passed through the meltdown crisis with flying colors. Implied but not stated is that now Canadian banks have a competitive advantge of relative fiscal health – then they do not need to be fettered.

Likewise in the arena of financial firms’ bonuses there is consensus that perverse pay and compensation/bonus deals at banks promoted the risky behavior  which triggered the Financial Meltdown. There is even consensus among the G20 countries that regulations have to be put in place to control this high risk taking behavior. But the key issue is that there is too much variation in the reforms being advocated in each country. For example, do Hedge Fund and Private Equity Managers who often earn 10 times as much as the Too-Big-To-Fail bankers, and whose speculation contributed to the 2008 fall – do these players get covered in compensation reforms. And each G20 country is watching like a hawk that they don’t regulate too much and then put their financial institutions at a disadvantage in securing and retaining scarce financial  personnel.

So despite the growing pressure  for robust  financial reform, the wavering  international nature of the reforms may well be a more serious threat to effective financial regulation  than an increasingly  dysfunctional Senate.