Global financial regulatory reform falls apart

By Felix Salmon
January 28, 2010

Is financial reform shattering into so many different pieces that it’ll never become the strong, coherent, globally-unified project that it needs to be to get popular support and avoid regulatory arbitrage? I fear so.

For one thing, there are literally more representatives of Bill Clinton here in Davos than there are of Barack Obama. If the Obama administration is serious about its newest ideas for regulatory reform, especially the Volcker Rule, it would have made a great deal of sense to send Paul Volcker — or at the very least someone like Austan Goolsbee — to Davos, to try to get the rest of the world excited about it. But they didn’t.

And even the president himself doesn’t seem to wedded to it. Here’s the relevant bit of his address last night:

I am not interested in punishing banks. I’m interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes. But that can only happen if we guard against the same recklessness that nearly brought down our entire economy.

We need to make sure consumers and middle-class families have the information they need to make financial decisions. (Applause.) We can’t allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

Now, the House has already passed financial reform with many of these changes. (Applause.) And the lobbyists are trying to kill it. But we cannot let them win this fight. (Applause.) And if the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right. We’ve got to get it right. (Applause.)

This is all so vague as to be meaningless; the one thing that’s for sure is that House has not passed financial reform with a Volcker Rule embedded — mainly because the Volcker Rule didn’t exist when the House was putting its bill together. Yet it seems that Obama is reasonably happy with the House bill in its present form.

What I’m worried about here, then, is that the Obama administration’s financial-reform proposals are being driven much more by domestic political calculus than by a coordinated international attempt to create a global financial system that is less leveraged and more stable than the one we’ve grown used to.

Obama proposed in his speech “that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat” — which is a good idea, and one I support, with strong echoes of the admirable Move Your Money campaign. (And, just like that campaign, I hope and trust that the concept of “community banks” will be expanded to include credit unions.) But this is a tactical move on the fiscal front, not a strategic one on the regulatory front. And my biggest fear right now — one reinforced both by Obama and by what I’m seeing in Davos — is that global financial regulatory policy is being constructed on an ad hoc, country-by-country basis. That doesn’t bode well for the future.

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