| Mind the gap: can Europe and the US build a new financial order? |
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John Springford Now that the worst of the financial crisis is over, governments are considering how to stop the next one. In the post-Lehman Brothers world, many banks are simply too big to fail, and continue to pose a systemic risk to the economy both home and abroad. The US Congress is currently considering a financial regulation bill, which is likely to pass in the first months of 2010. The European Union is further behind, but also expects to pass legislation next year. The UK, Germany and France are all in the process of reforming national regulation, in an attempt to reduce the risks that individual institutions impose to the financial system. In its new report, ‘Mind the gap: can Europe and the US build a new financial order?’, CentreForum uncovers the mismatches in financial reform legislation being considered. Obama wants to separate off the Main Street banking sector, backed by government guarantees if they go bankrupt, from Wall Street hedge funds and investment banks that would be allowed to collapse. Securitisation reform – where the EU is planning a 5 per cent retention rule, the US 10 per cent – is another example. There is transatlantic consensus that those complex ‘over-the-counter’ derivatives that led to the collapse and rescue of AIG need to be standardised and traded on exchanges. But countries are diverging on the details of how this should be done. These approaches need to be joined up. Finance is global, and apparently small differences in securitisation, derivatives, capital and trading rules are big opportunities for arbitrage. Capital will shift into countries where the returns are greatest. CentreForum suggests a practical reform that would make a big difference. The Financial Stability Board should offer appraisals of the systemic risk legislation that is going to pass in 2010 and 2011, highlighting the gaps before the bills are passed. National legislatures may find this unwelcome, but they should recognise that it is in all of their interests to find common solutions to the problem of global financial instability.
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