Sunday, October 19, 2008

USA: The Biggest Obstacle to Global Banking Regulation

(Felix Salmon) David Galbraith goes down the litany of problems with US banks which is familiar to any European in the US or, most likely, to anybody who even knows a European in the US. Most of it surrounds the ridiculous difficulty of moving money from A to B: in Europe, it's easy and free, online, or with a phone call. In the US, it's difficult, expensive, and nearly always involves some kind of paper check and the US mail.

The reasons for this are fundamentally regulatory -- and are the same reasons why there won't be any global banking regulation in the foreseeable future.

David wonders whether there's a connection between the ridiculously behind-the-curve state of US banks (I give chip-and-PIN a decade before it appears over here) and the problems that the US banking system finds itself in. The simple answer is no -- the problems are simply unrelated to the operation of consumer checking accounts. But more subtly, the single biggest obstacle between US banks and Europe-style checking accounts is the fact that the US banking system is ridiculously fragmented, overseen as it is by no fewer than twelve different Federal Reserve banks (not even counting all the federal regulators), and featuring as it does thousands of small and tiny banks which collectively are very good at stymieing attempts at sophisticated regulation.

So while Sarkozy and Brown are likely to get their desired New York summit on the global banking system, they're not even going to come close to a system of global regulation. Getting all of Europe's banks under one regulatory umbrella is one thing; getting America's under the same umbrella is something else entirely.

The U.S. is particularly queasy about international oversight of big banks. A senior Bush administration official said "ideas like that are probably political nonstarters in the United States, and in a number of other nations."

Remember that it was pretty much impossible even to get US banks into Basel II -- in the end the big ones did join, and the small ones didn't. America, even after the current wave of banking consolidation is over, will have many more small and tiny banks than just about any other country; the (excellent) credit union next door to me, for instance, has total assets of less than $20 million. And while no one wants to bring small and tiny institutions under international oversight, those banks can still derail the idea if they get an inkling that members of the big boys' club will have any kind of competitive advantage as a result.

And they'll probably derail any move towards chip-and-PIN, too, or schemes which make it easier to transfer money from one bank account to another.

The USA is based around regional banks; while there are now three banks which might have aspirations to being national (Bank of America, JP Morgan Chase, and Wells Fargo), all of them have enormous gaps in their national presence, and none of them is based within 500 miles of either of the others. When Hank Paulson wanted to get the CEOs of America's biggest banks in the same place at the same time, he took advantage of the fact that they were all in Washington anyway for the annual meeting of the World Bank. (And even then he had to make do with what he could get: the chairman -- not CEO -- of Wells Fargo, and the CEO -- not chairman -- of Citigroup.)

In other words, the US probably has less ability to herd and regulate its banks, or force them into a new global architecture, than any other major country. And we should all be prepared for disappointment when this summit finally happens.

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