Posted by: David Schneier
bank, banking, Basel, FDIC, FFIEC, GLBA, NCUA, Regulatory Compliance
I was scanning through emails the other day and almost missed a good one. It was from the FDIC on Friday, January 22. As we’ve all come to know Friday is the FDIC’s equivalent of “bring out the dead day” when they almost always announce the most recent slate of bank closings, so I didn’t pay it any attention at first. But it was issued early in the day and the barrage of bad news announcements typically doesn’t arrive until sometime around Happy Hour (you decide for yourself if that’s coincidence).
And so I popped it open for a read.
It was an announcement about how the FDIC and the Bank of England signed an agreement (they called it a Memorandum of Understanding or MOU) to cooperate with one another in the dissolution of cross-border institutions. Forgive a compliance geek his potentially misplaced enthusiasm, but I thought this to be a neat and somewhat intriguing bit of news. The biggest banks all operate on a global level and I know from first-hand experience that in many instances they do so not so much to tap into new markets but rather to exploit competitive and legal advantages (think Switzerland and their very favorable rules). One of the distinctive advantages of doing business this way is that what might go wrong in one marketplace is often insulated from the rest of their organization, thus reducing their risk; you may blow up one business unit but legally it doesn’t expose the remainder of the company. But regardless of the reasons, what this business model almost always creates is the overly complex monolithic banking monsters that have commonly been thought of as “too big to fail.”
This MOU is an important step towards doing something to simplify the global banking world. It potentially lays the groundwork for the oversight agencies that are often responsible for cleaning up the mess made by the banking giants to have wider authority to do what’s necessary to protect depositors (and tax payers) from absorbing the brunt of the blow. It also is the first salvo resulting from the recommendations of the Cross-border Bank Resolution Group (which operates as part of the Basel Committee) headed up by my favorite banking superstar, FDIC Chairman Sheila Bair. You might recall that she railed against the concept of “too big to fail” and as a result of her involvement with this group put herself in the position to do something about it.
I’m not sure how much further this sort of thing will extend itself, being bit of a cynic when it comes to banking oversight on an international level. You see, back in 2008, I conducted a fairly exhaustive amount of research trying to identify the FDIC’s counterparts around the world and was amazed and dumbfounded based on what I didn’t find. Outside of the U.S. and UK there really wasn’t anything even close on a functional level. Sure there were some government agencies in place but their role and powers weren’t anywhere close to what we have here. And I was all the more amazed that despite having the Euro currency in place and an organization to oversee its management there really wasn’t a related banking oversight group. When you think about Europe and how it’s laid out and how simple and obvious it would be for banks to operate across borders, you’d think they’d be among the first to coordinate efforts but it simply wasn’t there. So what we have at this point is an important agreement between the two most mature and best- organized nations regarding banking oversight. But this one was relatively easy; what remains to be seen is how the rest of the civilized world addresses this issue.
I’m hopeful that in light of the mess the global economy has been in due to mistakes made in the banking industry, that the various governments will move to get on board quickly but there’s little in the way of historical precedent to make anyone think that’s likely. Still, with Sheila Bair involved, you never know.