Clearly, an internationally coordinated set of rules is needed to cover the large international banks whose complex financial transactions cross borders and jurisdictions in ways that preclude a single national authority from sorting out problems that might arise.
But these rules may not be appropriate for the majority of countries. One of the lessons of the GFC is that simplicity is a virtue in financial structure. Asian banks came through the GFC in good shape in part because they lacked the arcane structures of the larger international banks.
Further, countries should not all aspire to have their banks as major players in international markets. As Ireland and Iceland found (and as was seen less devastatingly in Belgium, Holland, Sweden, Austria and Switzerland), international banks ‘live abroad but come home to die’, at the expense of domestic taxpayers. Policy-makers should focus on building robust domestic banks, which can facilitate international transactions, but which orient their business to the home market. Such banks should not be subject to the same rules as huge international financial conglomerates.
Beyond this, are the uniform rules of the Golden Straitjacket even feasible?
It took a decade of strenuous negotiation to put in place the last set of revisions to the Basel Rules, which were quickly overtaken by the GFC. Now it is already clear that fundamental differences of view exist as to what reforms are needed. Complex conglomerated banks in Continental Europe would fall foul of the Volcker rule (that banks should not carry out proprietary trading on their own account), so, even at this broad level, uniformity seems unattainable.
Instead, it may be better to see the Basel international rules as developing a minimalist framework, with each country’s supervisors using them as a template for a set of rules appropriate to their individual needs. Adopting this approach would encourage individual countries to get on with the task of reform without having to wait for tortuous international negotiations to grind out the Basel II rules.
The danger here is that an individual ‘go it alone’ approach might be seen as ‘Basel Lite’ or ‘Basel for Beginners’. This misunderstanding could be avoided if the G20 persuaded the Basel rule-makers to explicitly embrace the idea that their rules are a minimalist framework upon which others will build. The validity of this approach could be further assured if it were to be endorsed in regional forums.
East Asia already has an embryonic framework that is well placed to offer such support. This framework would link all the countries of the region into the overall international process. The six Asian countries that are members of both the East Asia Summit (EAS) and the G20 could form a regional FSB within the EAS framework, thus providing mutual sustenance for a ‘minimalist framework’ approach.
Stephen Grenville is a visiting fellow at the Lowy Institute for International Policy and a former deputy governor at the Reserve Bank of Australia.
There may be a need for different set of rules to be applied to different types of banks and financial institutions.
For predominantly domestic banks, that the rules may be more relaxed and each country’s authority can deal with them as they see fit, because there is not much international ramifications if a domestic bank failed.
For international banks, that is, they have extensive international operations, the rules should be international by nature, or subject to each and every countries rules where they operate.
So, overreacting and introducing unnecessarily harsh rules can be very harmful. They will certainly raise capital costs in many countries unnecessarily.
The point made by Grenville that most Asian banks including Australian banks worked well during the global financial suggests that not many changes will be necessarily needed for those countries.