The proposed new banking rules here in the U.S. caught many international bankers off guard and were one of the most prominent topics of discussion at the recent World Economic Forum in Davos.
As you probably know, the rules are designed to limit risk-taking by banks. There are two main proposals: 1) prohibiting commercial banks from engaging in proprietary trading, which is investing the bank’s money (with the obvious goal of earning more money, though it doesn’t always work out that way); and 2) limiting the size of banks.
Wall Street and bankers around the world were surprised when these proposals were issued in January. I heard from many international bankers in Davos that they were very disappointed that the Administration did not consult with bank or government officials in other nations before announcing its proposals.
Banking is clearly an international industry, and it would be difficult for one country to reform and expect the rest of the world to either follow suit or play along.
I think everyone would agree that you don’t want banks playing with depositors’ money, but these proposals seem to mix apples and oranges. There is a disconnect between what the possible new rules seem to be trying to fix and what precipitated the financial crisis. For example, there is a focus on proprietary trading, but that wasn’t what brought the system to its knees. It was debt securitization, leverage and derivative-related products that were the real problems.
Another important consideration is that U.S. banks could end up at a real disadvantage to their international counterparts, who may well have more freedom with less stringent requirements in their home countries.
The so-called Basel rules essentially govern European banks, and under new proposals that could be adopted by the end of the year, those banks might see requirements loosened for the amount of capital they need to have on hand. Plus, if international banks are allowed to have bigger balance sheets, they could end up being bigger winners for investors as well.
How this plays out will be important for all investors, in terms of investing in U.S. and non-U.S. banks. It also has implications for the global economy. It’s a story I will follow closely for you at CNBC and here in Investor Brief.
Everyone wants financial reform that addresses the real problems that precipitated the financial crisis. It’s important to be smart about it and not rush to judgment to appease those who are angry, no matter how justified that anger might be.
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