Regulatory arbitrage

NEW BUSINESS: "The Wall Street Reform Fight We Really Need," by Paul M. Barrett, Bloomberg BusinessWeek, 19 April 2010.

The key judgment:

Without global standards on capital and liquidity, Wall Street would set one jurisdiction against another in a game of regulatory arbitrage.

In effect, a clash of rule-sets triggered--perhaps--by our assumption that our proposed new rules would find worldwide emulation.

I would expect Europe to have tighter rules, America the looser ones, and that the rest of the world will effectively exploit the differences.

Comments

[Gilbert Garza]

Barrett Sees:

Missing: Government- Forced Shrinking of “Too-Big” :

“As long as we allow the leviathans to get too big to fail, they will be, well … too big to fail. We will rescue them to prevent worldwide depression. That, predicts Douglas J. Elliott, a former investment banker who is now at the Brookings Institution, will likely lead to "the same type of stumbles and traumas as we just went through."

Missing: Government-Forced Adequate Capital Reserves.

“What are missing are strong rules forcing banks to raise capital and liquidity levels. Such restrictions would be a real buffer against the sort of risk-taking that fueled our recent crisis.”

Coming: Government’s Opportunity to Work for Global Rule Sets to Include the Missing Above.

“Any meaningful action on capital and liquidity will have to play out internationally. Without global standards, Wall Street would set one jurisdiction against another in a game of regulatory arbitrage. So when the financial reform show wraps up in Washington, it will move to Switzerland, where the Basel Committee sets standards for 27 countries and territories. That's the forum where later this year we'll see whether the Obama Administration intends to take bold steps to challenge the Wall Street oligarchy.”

This last looks a lot like gathering tides of local economic and financial security demands at the lower level bubbling up and connecting to inform and form the necessary higher level governance to meet urgent local and inter-local needs for reform better met (or met only) through truly global reform with global system rule-set constitution and administration. Robert Wright asserts that this has been the story all along from tribes to chiefdoms from needs as hunter-gathers to needs as planter-harvesters on up to the formation of modern states with governance more familiar with each level of technology and civilization extending the need and use of information and governance-- toward globalization of information and governance. We will see if the Obama administration knows how wants to and can take advantage of this opportunity.

[Gilbert Garza]

Whatever is done or not done with global rule sets toward uniformity and balance in regulation of entity size (mentioned in the article) of financially-interconnected and economically critical financial entities is also more or less subject to arbitrage in valuations, in trade, in capital flows, in financial center relocations, and in everything else.