Policy Analysis No. 743

The New Autarky? How U.S. and UK Domestic and Foreign Banking Proposals Threaten Global Growth

By Louise Bennetts and Arthur S. Long
November 21, 2013

Since the 2007–08 financial crisis, global regulators have engaged in a lengthy struggle to reshape the international financial system to make it more resilient under stress. The purpose of this paper is to evaluate two recent and transformative proposals: the “Foreign Banking Organization” proposal of the U.S. Board of Governors of the Federal Reserve System and the United Kingdom’s “ring-fencing” plan. Both of these proposals are intended to protect national financial systems from the risks posed by a failure of one or more global, interconnected banking organizations operating within national borders.

We analyze whether the proposals are likely to meet their own stated objectives and consider their likely effect on the global financial system. We argue that these measures amount to little more than a mandatory, inefficient shuffling of corporate entities and business units that will not help ward off future financial crises. At the macro level, both proposals interfere with the ability of global banks to allocate capital and liquidity in the manner they determine to be most efficient. We find that the proposals, therefore, threaten to increase financial instability and dampen economic growth and signal an unfortunate step in the wrong direction.

These proposals underscore the problems with national regulators adopting a parochial, protectionist, or “home country first” approach to regulation. We argue that even poorer outcomes would have resulted from the prior crisis had these proposals been in place at the time. We contend that regulators should instead focus their attention on creating a credible, coordinated resolution process for globally significant firms.

Louise C. Bennetts is associate director of financial regulatory studies at the Cato Institute. Arthur S. Long is a partner in the New York office of the law firm of Gibson, Dunn, and Crutcher LLP, where he is member of the financial institutions and securities regulation practice groups.