By David Weidner, MarketWatch
SAN FRANCISCO (MarketWatch) — Forget Dodd-Frank. Forget shadow banking. Forget the taper. Forget the U.S. of A.
Because in the end, as much as we think American financial influence dominates the world, it doesn’t. The U.S. has just 15% of the world’s banking assets.
France has 8%, the United Kingdom, 9.5%, Germany, 4%, China, 14% and Japan nearly 4%. All have institutions too big to fail.
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That’s why a global regulatory game plan to deal with troubled banks and financial institutions — hedge funds, insurance companies and brokerages — that’s uniform across institutions and borders is so important.
Now, a disturbing report from the Milken Institute shows just how far the global effort has fallen short.
“Although policymakers around the world continue to respond vigorously to the problems in financial markets and institutions brought into high relief by the global financial crisis,” the report concluded. “The overall understanding of those responses remains vague and limited.
Regulators “have a very long way to go in that respect.”
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The report, written and researched by James R. Barth, Chris Brummer, Tong Li, and Daniel E. Nolle, concludes that while regional and country-specific regulators have made efforts toward dealing with a 2008-like crisis, the different approaches may make their efforts moot.
For instance, U.S. regulators have created the Financial Stability and Oversight board, a council made up of regulators from the Treasury Department, Federal Deposit Insurance Corp., Securities and Exchange Commission and other regulatory bodies to unwind failed institutions.
But in Japan, for instance, a similar approach doesn’t exist. Even in places where they do — the U.K. has a similar regime — a powerful global regulator doesn’t exist.
That’s why the authors called upon the G-20, the organization that met last week in St. Petersburg, Russia, to beef up the Financial Stability Board. The FSB was created in 2009 in response to the crisis.
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To be fair, the FSB has done some work. It pushed for new international bank capital standards known as Basel III. And though most of the global banks have yet to meet the minimums soon-to-be required, most national bank regulators have signed on, including the U.S.
The FSB also has been aggressive and transparent in identifying which banks are systemically important. Together, the banks represent 26 countries and represent 112% of the world’s GDP when measured by asset size.
Still, the authors note that some banks didn’t make the cut, mostly because of differing accounting standards in their respective home nations. One glaring omission: Industrial Commercial Bank of China, an institution with $2.7 trillion in assets.
Along with two other big Chinese banks, the FSB also didn’t include Lloyds Banking Group /zigman2/quotes/202285510/delayed UK:LLOY -0.82% of England, Commerzbank of Germany or MetLife Inc. in the U.S. — all of which rank in the top 50 of global financial institutions by market value.
Strangely, Royal Bank of Canada /zigman2/quotes/200638870/delayed CA:RY -1.38% , with a balance sheet of more than $800 billion — 23% of that nation’s banking assets didn’t make the list. That’s troubling not only because of RBC’s market share in Canada, but because of its exposure to potential crisis. It has, for instance, a derivatives portfolio of more than $91 billion, according to the report.
Even for those banks identified as “systemically important” and under the FSB’s purview, there are hurdles to taking action should a crisis arise. International law doesn’t require domestic regulators to act or follow the FSB’s mandates. And the problems that arise from this aren’t foreign to bank observers. Much of the financial crisis was about transparency and reporting.
“Monitoring of compliance with international standards has,” the report said, “been less than robust.”
Though the report doesn’t say it specifically, it’s easy to see what’s happening here. Nations, including the U.S., don’t want to give up their sovereign right to regulate banking. And that’s understandable.
But the price to be paid for autonomy is great risk. In giving up a say in your own nation's banking industry, you do get a say in the global banking industry. In the post-financial crisis era where banks are interconnected, when one catches a cold, everyone gets sick.
In other words, you may think you have a pretty good eye on your domino standing on end, but if someone isn’t watching them all, what good does that do?
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