The level playing field is a regulatory pipe dream

June 7, 2011

By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Tim Geithner is worried about a regulatory race to the bottom. The U.S. Treasury Secretary has warned other countries against taking advantage of tough rules introduced in the United States. He has a point. But the quest for a global level playing field in financial regulation is futile — and confusing.

It was encouraging to see how quickly policymakers joined forces to agree new global rules in the aftermath of the financial crisis. The Basel III system for banks was finalised less than two years after Lehman Brothers collapsed — a fraction of the time it took regulators to hammer out the previous accord.

But as the crisis has faded, so has the consensus. It’s still far from certain that regulators will be able to strike a global deal to force big banks to hold extra capital. Asian governments are showing few signs of following the U.S. and Europe’s approach to regulating derivatives. Meanwhile, private disputes are spilling into public view: look at the extraordinary attack by Germany’s market regulator on the European Banking Authority, which is overseeing Europe’s bank stress tests.

Some global minimum standards are clearly necessary, and desirable. But there’s no reason to prevent national regulators from adopting tougher standards in their own jurisdictions. Small countries with big banking systems, like Switzerland, should be allowed to impose tougher capital requirements for their lenders. Likewise, new regulators such as the UK’s Financial Policy Committee, which is charged with keeping a close eye on potential asset price bubbles, must have the tools to rein in financial excess. But that won’t be possible if the European Commission insists on a strict and uniform interpretation of the standards imposed by Basel III.

Besides, adopting global minimum standards is a big enough challenge. Despite Geithner’s promises, many still believe that Washington will wriggle out of implementing Basel III. Remember that the United States was one of the first countries to propose a levy on banks’ balance sheets — only for the plan to be blocked by Congress. All this suggests regulators should concentrate their efforts on designing and implementing global minimum rules. A level playing field is an unworthy extra goal.

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