Widespread expectations that U.S. officials are about to announce an unprecedentedly large and sweeping fine on a French bank, BNP Paribas SA, are an opportunity to consider where the international financial community stands on regulation, compliance and enforcement in the wake of the devastating global crisis that first surfaced publicly in 2008.
In the aftermath of the financial crisis, the philosophical underpinnings of the West’s approach shifted from flawed and ill-conceived notions of “light touch” regulation to deeper and better coordinated regulation. No longer would governments and central banks trust in enlightened “self-regulation” by banks that had engaged in excessive and irresponsible risk-taking and improper -- and sometimes illegal -- lack of disclosure about their activities.
That behavior triggered cascading market failures, all of which put national authorities in the unenviable, Catch-22 situation of either rescuing financial miscreants by deploying huge bailout programs funded by taxpayers, or allowing the financial debacle to cause widespread havoc in the real economy.
Having managed and contained the crisis through a series of innovative but expensive measures, governments rightly sought to forestall future financial crises through stronger regulation, better auditing and disclosure, heftier capital cushions, limits on certain trading activities, and more effective enforcement. The goal was to credibly strengthen the underlying resilience of both individual firms and the system as a whole, while containing the crisis's economic fallout.
Given the cross-border interconnectedness of the financial system, multiple national regulatory reforms were pursued alongside heightened international policy cooperation. At the same time, regulatory and enforcement institutions at the national, regional and global levels were revamped to support all of these shifts.
Progress was noteworthy at the national level, and well-coordinated across countries. But as the immediacy of the crisis has receded, governments have found it increasingly hard to coordinate and maintain the momentum they once enjoyed. As such, insufficient cross-border alignments risk undermining the soundness and stability of the economies that the financial system is meant to serve.
And so we come to BNP Paribas, which is expected to plead guilty today to criminal charges of allegedly masking about $30 billion in transactions with Cuba, Iran and Sudan -- for which it may pay a fine of as much as $9 billion. When the possibility of a major BNP fine first emerged a few weeks ago, the French government reacted strongly because it was concerned that the breadth of the law-enforcement measures were meant to score political points rather than promote sound regulatory policy. French concerns were so acute that France's president, Francois Hollande, intervened very publicly on the matter with U.S. President Barack Obama, only to be reminded by the White House that the executive branch doesn't interfere with such legal matters.
While the question of a potential politicization of regulation continues to worry France, that pales in comparison to the bigger risks associated with multiple and uncoordinated national regulatory measures that can weaken economic performance and employment. That lack of coordination can increase uncertainty, discourage banks from funding productive long-term investments, and fuel anti-globalization and isolation -- all of which hampers and distorts extending credit to small- and medium-sized firms that are major drivers of employment and innovation.
The appropriate response to these challenges is certainly not less regulation. Instead, it lies in more serious efforts to better coordinate regulation under the auspices of an institutional structure that has been recently revamped for this very purpose. In addition to countering a headwind to growth and jobs, this would serve to reduce harmful suspicions that individual actions against foreign institutions are driven by national political vendettas rather than genuine compliance and enforcement priorities.
To contact the writer of this article: Mohamed A. El-Erian at M.El-Erian@bloomberg.net.
To contact the editor responsible for this article: Timothy L. O'Brien at firstname.lastname@example.org.