Zillion banks

SHORTLY after the financial crisis spread around the globe like a plague, the world’s leaders working through the Group of 20, agreed to adopt common rules for all financial companies, no matter where they operated. The global system would be less risky, if derivatives dealing, an opaque $639 trillion market, worked more like stock trading on exchanges. If large banks had more capital, they would be able to absorb losses so taxpayers wouldn’t have to. And if money-market funds and other parts of the shadow banking system were more tightly regulated, there would be fewer hidden risks.

Since that 2008 pact, progress has been made on the road to convergence. One example: Starting on March 11, Wall Street’s largest banks, including Goldman Sachs Group Inc and JPMorgan Chase & Co., must process derivatives trades through clearinghouses, an accomplishment of the 2010 Dodd-Frank financial reform law, itself part of the US’ commitment to convergence. By holding collateral and standing between buyers and sellers, clearinghouses can prevent one participant’s default from infecting all the others. In another step forward, the EU decided in December to create a single bank regulator. But the dream of convergence remains, well, a dream. Conflicting national and regional laws, regulations and accounting standards have blocked the world from getting on the same page on financial reform. This, in turn, has jeopardized the ability of regulators to work across borders to address the next crisis. Shutting down a large failing bank that, say, loses all its capital because of a trading strategy gone haywire isn’t possible without universal rules for resolving sick banks. Moreover, financial companies will be able to take advantage of regulatory arbitrage — shifting operations to countries with the loosest rules. In the US, regulators have been lobbied to a standstill. They have yet to name a single nonbank financial company or industry as systemically risky, despite the immense size and vital roles played by money-market funds, hedge funds, insurers and nonbank lenders.

Meanwhile, lawmakers from both parties and both chambers want to repeal parts of Dodd-Frank, including the requirement that banks move derivatives trading to separate affiliates with their own capital. In Europe, the situation is no more auspicious. A nasty split has opened between the Continent and the UK. The European Parliament and national governments have moved in recent weeks to tax financial transactions and cap bankers’ bonuses. This has rightly rubbed the British the wrong way, as their model of finance — the Anglo-Saxon model — is less regulated, more centered on trading and pays bigger bonuses than its counterparts in, say, France or Germany. Another rift is between Europe and the U.S. — this one over capital requirements. New rules being written in Basel, Switzerland, have been watered down after much bickering. The level is now set at 7 percent of risk-weighted assets, up from 2 percent. Still, it falls short of the 10 percent initially sought by the U.S., and way short of the 20 percent of total assets that some economists and academics recommend. France and Germany led the opposition, seeking to protect the interests of their biggest lenders, which would have needed to raise more capital than foreign competitors. Not only is the global financial system no safer now than it was in 2008, it’s also clear that the project of convergence is badly stalled. Is the world really prepared to let the great convergence turn into the great divergence?