Regulatory arbitrage datapoint of the day
Regulators around the world are trying to both change their regulatory framework in dramatic ways and to bring those new frameworks into line with each other. Given the difficulty in doing either, my feeling is that successfully doing both, while necessary, is also all but impossible.
For an example of just how difficult this kind of thing can be, just take a look at the the latest international incident surrounding Swiss bank accounts. This time, it’s details of 1,500 alleged German tax evaders with accounts at HSBC Switzerland; their information is being shopped to the German authorities for â‚¬2.5 million.
Put to one side the ethics of paying for stolen information; assume that former HSBC employe Herve Falciani was willing to give the information to the Germans for free. The point here is that something which is perfectly legal in Switzerland — tax evasion — is illegal right across the border in Germany.
For most of the recent boom in the financial services industry, there has been a deregulatory race to the bottom — the equivalent of all countries feeling forced to adopt a Swiss-style regime where most financial transactions and accounts are essentially sheltered beyond regulatory oversight. Any time that someone started talking about beefing things up a bit, the big banks and their lobbyists would start talking about “the status of [insert city/country here] as a financial center”, and nothing would come of it. All you need is one London or Switzerland where the rules are lax and where money flows freely, and everybody else is essentially rendered powerless to prevent excesses and abuses.
The UK authorities, having suffered an enormous fiscal cost in bailing out banks which took too much risk, are now on board in principle with the need to tighten things up; in terms of private banking, the Swiss aren’t even close yet. But in order to see what regulatory arbitrage looks like in the real world, all you need to do is ask the tax authorities in the US, Germany, and France what they think of the Swiss regime, and what they think of prospects for constructive cooperation going forwards. If it’s not going to happen in the world of private banking, it’s going to be hard to get the same banks regulated consistently when it comes to their commercial and investment banking functions.