#Banking, Basel, stress tests, the #IMF and the #G20 — return of the state or return to business as usual?
Another week, another set of screaming headlines dominated by Europe….but not the EU. The simultaneous disappointment and relief in the public commentary surrounding these two events over the last seven days demonstrates a serious mis-reading of underlying trends in the policy space. The disappointment is misplaced. While changing the business of model for banking is certainly still a high regulatory priority, the direction of that change is driven by economic reality rather than political rhetoric. The relief is stunning as well; it signals market confidence that European sovereigns (backed by the IMF) will support their banks….not that the banks acquitted themselves well in soft stress tests. Regular readers of The Risk Telescope are not surprised by these outcomes.
Today’s issue takes the events of the last week to look ahead and ask whether we are seeing a mean reversion globally in how international banking standards are set. The headlines suggest a return to business as usual, in which bank lobbyists in Basel guide the normative process. This analysis is superficial. It ignores a more profound shift in global policymaking. It also ignores major political initiatives globally emanating from Asia, which increasingly views the current situation as Act II of the “North Atlantic financial crisis.” The rhetorical similarity to the description of the 1997-98 “East Asian financial crisis” is no accident…and the potential impact on economic and regulatory policy frameworks may be as large.
Specifically, this issue of The Risk Telescope explores the emerging tensions between sovereign and G20 policy priorities, predominantly but not exclusively through the prism of the EU stress tests and the Basel outcomes. The research suggests that profound statist trends to protect domestic banking franchises transcend lobbying activities in favor of “macroprudential” outcomes designed to deliver economic stability (if not growth). The consequences for regulatory policy and asset allocation strategies will be significant if the trend line continues through the autumn. The bottom line is that we have not yet reached a steady state regarding decision-making structures internationally, as Asian economies in particular seek a stronger voice in global policy processes. This will impact the structure of regulatory standards as well.
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