Ce message est également disponible en : French

Anne-Lorraine Bujon (ALB): In your article “Not all financial regulation is global”[2], you underscore the paradox of a growing demand for reregulation that would, in itself, make the construction of a global system of financial regulation more complicated. How do you explain this tension?

Nicolas Véron (NV): It is true that international agreement is harder to reach than it used to be. Before the crisis, it was relatively easy to agree on how to regulate and channel financial flows and to define what firms could and could not do, because there was a general trend towards deregulation and a dismantling of national barriers. Today this is becoming more difficult because we are in a period of reregulation and thus of divergence between different countries. Financial structures are different from one country to another, as are cultures and political systems. Interactions and connections between public decision-making systems and financial systems also vary a great deal. To give a practical example, the typical model in Europe is that of the “universal bank” that participates in the whole range of financial services (asset management, retail banking, investment banking, commercial banking, wealth management, etc.). In the United States, by contrast, there is a tradition of separation of functions, so that households often keep their savings in a specialized institution that is separate from their bank. And there is a relatively clear separation between the different segments of the value chain more generally in the US. These two systems generate different demands for regulation, even when they agree on the problems that need to be addressed, which is not always the case.

There is a second factor that may create difficulties in the future, and that is the fact that the crisis accelerated the rise of emerging countries on the global financial landscape. Until now, the West has maintained its preeminence in the domain of finance, much more than in the fields of international macroeconomics, trade or the environment. Today, this is less and less the case. Even though the outlines are still not very clear, the financial world’s center of gravity is shifting and placing emerging countries in an increasingly important position. The shift has not yet produced any conflicts, but it could in the future, as tensions appear between the interests of emerging countries and those of the developed world. For the time being, the financial sectors of the largest emerging countries are generally much more strictly regulated than in developed countries. If the emerging countries continue to deregulate while the West reregulates, the result will be convergence rather than divergence; but we can anticipate the point where the two paths will meet and disagreements will appear on certain subjects. Moreover, financial actors in emerging countries do relatively little international business at this point. This means that they are not in direct competition on international markets with large financial firms based in the West. Here too, however, it is very likely that competition will become increasingly fierce over time, generating tensions between countries that are looking to promote their “national champions”.

All this leads us to conclude that we must look very closely at what can be achieved on a global level in terms of financial regulation. The G20 started off with a very ambitious program, but one that can only be partially realized. At this point, the forum needs to prioritize its action so that regulation at the global level actually produces results—specifically, global oversight of the factors that create financial instability and adequate supranational regulation of capital markets that are now highly integrated at the global level. It would not be in our interest to roll back capital market integration, but regulating these markets on a global level requires more ambition than we have seen until now.

It is true that there is less consensus on the economic benefits of financial integration than on the benefits of trade integration. Most economists agree on the need to be able to transport containers all over the world, whereas the economic ramifications of unrestricted capital movement are more difficult to analyze. But with the necessary safeguards, including restrictions on capital flows in and out of certain developing economies, capital market integration allows for a better allocation of capital. It enables economic agents to obtain financing more easily and those who wish to invest to do so under better conditions. From this standpoint, the fragmentation of capital markets would be highly dangerous and governments must ensure that it does not happen.

ALB: If different national political contexts make financial regulation more difficult, wouldn’t the ideal structure be one that was not under political control?

NV: Except that we live in a political society and politics is not some external and harmful constraint imposed on the financial system from the outside. On the contrary, it is fundamentally inseparable from it. Financiers often regard politics as a hindrance imposed on their work, but the financial crisis shows that such thinking is wrong-headed. Markets need regulation because without it they create instability and crises that require government intervention. When a systemic crisis occurs, financiers are the first to ask for government help, which they generally get because of the potentially catastrophic effects of an uncontrolled financial collapse. In other words, 99% of the time it appears as though the financial world is operating independently from political society and our forms of collective organization, but this impression is misleading. It highlights the inherent tension between increasingly integrated global financial markets and the political fragmentation that prevails at the global level. There is no perfect solution to this challenge. In the absolute, many financiers would like to see a system that is harmonized and integrated on a global level; on the other hand, they can make a lot of money from regulatory arbitrage, i.e. exploiting differences in regulation between one country and another. Government policies should seek to limit such regulatory arbitrage, which often generates financial instability. Political leaders must navigate these contradictory pressures and demonstrate good judgment in order to concentrate their efforts at the international level on issues that cannot be dealt with more locally.

ALB: With respect to the objectives set by the G20 last year, you also show that where much progress was made, it was thanks to independent oversight institutions with their own human and financial resources.

NV: This is another paradox of the current situation: the world’s political fragmentation, especially with the rise of the emerging countries, makes it increasingly difficult to legitimize authorities for global oversight or financial standards. It is difficult to reach an agreement on the delegation of sovereignty to global authorities, especially since emerging countries tend to cling to sovereignty even more tightly than developed countries (China being an extreme example). At the same time, we would need strong authorities to have an impact at the international level, because the diversity of viewpoints makes it impossible to achieve results through informal consensus. We have tried to measure the correlation between the implementation results of the forty-seven measures decided by the first G20 summit in November 2008 and the institutions tasked with implementing them. Our results suggest that the more the G20 leaders entrust implementation of a measure to a global institution with its own resources and capacity for initiative, the more likely it is to actually be put into effect.

ALB: On that point you mention the idea of relocating the headquarters of a major international institution to an emerging country, in order to make the role of these institutions more acceptable.

NV: The West tends to underestimate just how much emerging countries mistrust major institutions like the IMF and the World Bank. This is especially true for Asian countries, which have very bad memories of the Asian Financial Crisis in 1997-98 and the IMF’s intervention, perceived as humiliating. Should the IMF or the World Bank be moved to Singapore or Hong Kong? I personally believe that it would be a very powerful symbol, and perhaps we need that kind of shock to change mentalities. In a globally integrated world, we have to ask ourselves this type of question if we want to secure the commitment of emerging countries. It may seem like a detail, but many questions relating to international banking regulation are now discussed in Basel, which is a relatively small place. For a Brazilian, getting to Basel is a logistical nightmare. If we want to keep such institutions from being perceived as symbols of a Western system of domination, we will probably need to rethink their geographical location.

ALB: If delegating sovereignty is both increasingly necessary and difficult in the current context, is there a special role for Europe to play?

NV: Europe is in a peculiar position. It represents a philosophy, a method and an experiment in international cooperation and shared sovereignty, which can serve as a laboratory for the rest of the world. At the same time, however, Europe must devote so much energy to internal coordination that it tends to give priority to this coordination rather than to the outside world, because it is unable to deal with so many constraints. Europe’s driving force was based on an effort to align its policy of deregulation with the policy promoted by private-sector players at the international level, but it has disappeared. This raises the question of what will replace it. Will Europe produce its own particular regulatory model, apart from the international community, or can it still use an international convergence project as a starting point to define its regulation strategy? The answer is far from clear.

ALB: Couldn’t the demand for regulation actually give Europe a new momentum?

NV: The problem is that each European country sees regulation differently. So the question is how the EU can coordinate these different visions when they no longer have a global model of regulation to serve as a unifying force. For historical and cultural reasons, EU countries have very dissimilar outlooks on regulation. For example, in the United Kingdom, the main issue is whether the banks are too big. Should they be broken up to reduce their potential to destabilize the financial system as a whole? Should investment banking be kept separate from retail banking because they have different risk profiles? British public opinion may be divided, but the issue is considered altogether taboo in France and Germany, where politicians prefer to accuse speculators and hedge funds even if they played a minimal causal role in the crisis. So you can see that even though there is talk of reregulation on both sides of the English Channel, debate takes two different forms. Finding a model that speaks to the entire EU is very difficult, both for the European Commission and for the EU in general.

ALB: You also say that the subject of financial regulation is a sort of poor cousin to that of economics.

NV: It is a subject that the crisis has brought into the limelight, whereas it was neglected in the past. For macroeconomists, there was no model of the financial system so it was almost as though it didn’t exist. It was regarded in a way as being self-evident. The crisis has shown us that this is not the case—the financial system is complex and liable to behave in peculiar ways that macroeconomists do not really know how to model. Conversely, and with a few important exceptions, financial economists have made very little connection between their subject area and economic development as a whole. In other words, they have been unable to see the forest for the trees. Examining the interdependence between financial economics and macroeconomics is absolutely crucial if we want to understand the economy not only when everything is running smoothly but also during periods of instability.

ALB: If we could design the ideal architecture for financial regulation institutions, what would it look like?

NV: There is no ideal architecture for financial regulation at the global level because we do not live in an ideal world. It should look more like a Japanese garden—a landscape you discover as you walk through it, where the perspective changes with each step and you constantly have to adapt—rather than a centralized and symmetrical French garden. Everything that can be done locally should be done locally. It is unrealistic to try to make an international institution like the IMF or the Financial Stability Board into a control tower for everything that goes on in the financial system. It’s an attractive idea but it will never happen. We can see all too well that any claim to leadership by a financial player is counter-productive in international discussions. So we have to learn how to live with diverse centers of influence and public decision-making at the international level. The principal problem today is the difficulty of sharing sovereignty, so we might as well manage it by taking measures to deal with problems as they arise.

To give an example, the auditors responsible for ensuring that the information provided by firms complies with accounting standards are very important actors in the financial system. At this point, there is no credible framework that allows financial statements to be compared between one country and another. This is because of differences in accounting practices and the application of standards, even when they are unified at an international level. Perhaps we should find a way of supervising and controlling large auditing firms in order to guarantee coherence at an international level, rather than at a strictly national level as is currently the case. Problems should be dealt with pragmatically, on a case-by-case basis. So we are basically talking about a deliberately partial approach to institutional experimentation rather than a master plan, which wouldn’t make much sense at least in today’s world.

ALB: But the overall aim would be to ensure more oversight and control so that the information people exchange is the same for everyone, without refragmenting capital markets?

NV: We have to ensure the fluidity of information without trying to impose supranational decision-making on all aspects of finance. This is difficult because in finance, more than in any other domain, information is power. So we must try to dissociate as much as possible the fluidity of information at the global level (i.e. a harmonization of the standards and practices for preparing this information) from oversight capacity at this level. And, at the same time, we must respect local sovereignty, especially in budgetary matters. The fundamental idea is that investors should be able to invest anywhere in the world, and conversely, those who need capital should have access to the largest possible pool of investors. Financial autarky, by restricting this accessibility, makes everyone poorer. Financial integration should be centered on integrating capital markets, whereas it has traditionally been centered on financial firms, especially the big banks. Before the crisis, public officials were mostly concerned with removing barriers to international business for big banks. The lesson of the crisis is that, because banks are essentially guaranteed by their home countries, barriers to their internationalization are both necessary and legitimate. However, this should not prevent the integration of financial markets as such. Both perspectives are clearly linked, since the role of an investment bank is to act as an intermediary on capital markets. However, they are still different in terms of their practical consequences, and it seems to me that an approach that focuses on the integration of markets is much more relevant from an economic standpoint.

ALB: Are public decision-makers sufficiently independent from financial lobbying?

NV: Wall Street is always said to wield exorbitant political power, and it is partly true, but it actually seems to me that the financial sectors in continental Europe have even more political clout. Perhaps financial leaders in continental Europe tend to accept politics more easily because they believe they control them much more effectively. It is a fact that financial power is significantly more concentrated in Europe than it is in the United States. In terms of their total assets, the largest three American banks represent around 45% of US GDP. Americans, especially those on the left, find this unacceptable because twenty years ago the figure was around 8%, which means that concentration at the top of the American financial system has increased significantly over the last twenty years. But in all the large European countries, the ratio is over 100% and is often as much as 200 or 300%. This reality is obscured by the relative opacity of large segments of the European finance sector, unlike in the United States, where the financial system is generally much more transparent. In my opinion, the challenge is not to completely annihilate the financial sector’s political power, which cannot be done without losing all the economic benefits it provides, but rather to ensure that this power is sufficiently offset by mechanisms of democratic control.