Mon, Aug 03, 2009 - Page 9 News List

Universal revulsion prompts a retreat from global banking

The era of financial globalization may be coming to an end as nations seek to put up ‘circle fences’ around local assets of global financial institutions


Virtually universal revulsion at the errors and excesses of the financial giants and the global recession that resulted has not led to any real consensus what to do about it at either national or international levels.

Instead countries are looking out for themselves or simply quarreling. Recriminations are in fashion, whether against regulators who allowed bailed-out bankers to get big pay packages or against financial institutions that were unpopular in some countries long before the financial crisis.

Eighteenth century English author Samuel Johnson once said: “When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”

He might have added that a reprieve from the death penalty can cause the mind to wander.

That wandering can be seen in the UK, where the Labour government has put together a package of regulatory reforms that the Conservative opposition vows to repeal if it wins the next election, as is widely expected.

It can be seen in Washington where the US Federal Reserve and the Treasury are being pilloried in Congress for actions that were necessary to avert a collapse of the global economy last fall.

The Institute of International Finance, a group of the world’s largest financial institutions — the ones that would be most affected by a sharp retreat in financial globalization — put out a report on Thursday pleading for international cooperation and voicing fears in particular about national efforts to apply differing standards for local affiliates of international banks.

“We are operating in a globally interconnected world where we need to strengthen the system’s capacity to minimize the risks and to maximize the benefits of the interconnected global marketplace,” said Josef Ackermann, the chief executive of Deutsche Bank and chairman of the institute.

The big banks are particularly concerned about a proposal by the UK’s Financial Services Authority to “ring fence” the assets of British subsidiaries of foreign financial firms. Other countries have indicated they may follow suit, noting the way Lehman Brothers brought assets home before it failed.

For any one country, the group said, that might appear prudent.

“But this can only put the brakes on global recovery, global finance capacity and ability to respond to global liquidity problems,” it said.

What was global before the crisis, however, quickly turned local. The countries that suffered the most were those that had no locally owned banking system — think of Eastern Europe — and those that had banking systems far larger than the nation could afford to rescue — think of Iceland.

To many, the crisis showed the dangers to so-called host countries of relying on foreign banks that are supervised by home country regulators. When bailouts were necessary, the home countries were reluctant to let the money be used overseas.

Charles Dallara, the managing director of the institute, quoted a central banker as saying privately and sadly: “We are going back to a world of national banking.”

Dallara thinks that would be disastrous for global efficiency and global growth.

There could be a healthy debate on that issue. Over the last 30 years, financial globalization appeared to be crucial to increasing global growth and prosperity. Is that record unworthy of respect in the aftermath of the collapse or are there ways to keep the benefits while avoiding a new financial crisis?

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