When it comes to bailouts, banks have enthusiastically flown the flag of their “home” country and displayed a particular fondness for their country’s generous taxpayers. But when it comes to making money, suddenly they remember that they are really citizens of the world not beholden to any one country and certainly not to any regulators. They are responsible only to their shareholders.
During the first global financial crisis, IKP was happy that it was a German citizen when both Federal and State governments came to its aid to the tune of €7.2 million to save it sinking into a sea of bad debts. Similarly, UBS took comfort in its Swiss citizenship when the government handed over $5.3 billion and allowed it to transfer $60 billion of distressed assets to the government. The bankrupt Anglo Irish danced a jig when it received $7 billion from the Irish government, while in the US, AIG flew the Stars & Stripes in appreciation of the generosity of the US government, which provided it with $85 billion in emergency loans. Moreover, Kuwait, Netherlands, Australia, Austria and a number of other countries embraced their so-called national banks, providing guarantees against failure, all of which helped stave off runs by depositors.
Understandably, as the 2007 global financial crisis receded, governments around the world started to look at what they needed to do to prevent another crisis and protect themselves from bankers knocking on their door for future bailouts. Measures taken include requiring banks to hold more capital in reserve, which would cover any unexpected losses, and forcing greater transparency on their balance sheets, particularly in areas like derivatives, which were one of the financial products that exploded in the face of many unsuspecting bankers in 2007.
Four years after the last crisis and no longer red-faced at having been caught short or having to accept handouts, let alone showing any remorse for crippling the global financial system with their ill-judged risk-taking, bankers are aggressively resisting new regulations designed to prevent a repeat of the crisis.
As a result, efforts to introduce regulations have had mixed success, primarily due to the lobbying efforts by the very same banks that were in serious trouble during 2007 and 2008.
Suddenly, bankers remembered that they were citizens of the world and warned governments not to introduce stringent regulations, which would only put them at a competitive disadvantage with banks from other countries where they were lightly regulated.
In light of the current crisis in Europe, it’s interesting to note that some of the most aggressive lobbyists were the three major French banks – BNP Paribas SA, Société Générale SA and Crédit Agricole SA. It now appears that these very same French banks have been hiding serious problems: foolish investments in Greek bonds. To make matters worse, they have inadequate capital reserves to cover any write-downs. Presumably, very soon they will remind the French government that it has an obligation to get them out of trouble.
A number of banks have not even bothered to lobby to get their way. To avoid regulation by a particular country in which they operate, they have legally changed their local operation from a subsidiary, which is subject to local regulation, to a branch, which is not.
For example, earlier this year, Deutsche Bank’s Portuguese operation changed its status from a subsidiary to a branch. This decision coincided with the introduction of stricter bank regulations in Portugal.
These are the privileges of being a citizen of the world, and banks have used globalization to choose which jurisdictions and which country’s laws they prefer to operate under.
The solution is both ridiculously simple and fiendishly difficult to put in place. Countries need to stop treating banks as their own nationals and treat them as citizens of the world, which is what they really are. As citizens of the world, banks should be regulated as such, uniformly and with sufficient rigor to avoid future banking crises.
Unfortunately, no country would agree because they believe this would threaten their sovereignty. In reality, international banks have used the globalization of capital markets to make a mockery of their sovereignty, so they have nothing to lose by cooperating with international rules but much if they don’t.