The Group of 20 meetings in Moscow this week offer the world’s industrial powers an opportunity to push for better coordination of global financial regulations that give banks clear guidelines to follow, the new chief of the Washington-based Peterson Institute for International Economics said in an interview Tuesday.
Adam Posen, the second head of the Washington-based international economic think tank, also said he expects G-20 leaders to seek ways to avoid a currency war, discuss trade opportunities and ease stringent austerity measures that a number of leading industrial economies have embraced in recent months.
In the wake of the financial crisis a few years ago, global regulators devised measures such as the Dodd-Frank financial reform package in the United States to rein in risky banking activities. But each country has different regulatory approaches, meaning countries with tougher regulations could be undermined by standards in other countries.
“We don’t want to have races to the bottom, where one bank says, ‘OK, you’re regulating me too much. I’m going to move my headquarters to the Bahamas to try to avoid regulations,’” Mr. Posen said in an interview with reporters and editors at The Washington Times.
The danger of “regulatory arbitrage,” he said, made it even more important for G-20 leaders to develop a consensus on banking regulations.
But an even bigger problem looms on the banking horizon: No matter how tough any of these regulations sound, some banks are still seen as “too big to fail.”
“If a bank is important to the economy, it’s very difficult for regulators to scare them enough” into obeying, Mr. Posen said. “The idea is that that has been the tough part, because you’re scared to shut them down, because you’re worried people will panic. But if you don’t shut them down and they’re bad, you just get worse and worse problems.”
He called it the “eternal dilemma” of the systemic financial crises.
International regulators “need a procedure in place so that banks believe they will actually shut them down,” he said.
Banks have taken steps to repair their images since the financial crisis, but they still have work to do, Mr. Posen said.
“I think there’s a tendency for some of the banks to say, ‘The time for bashing us is over,’” he said. “It would be smart, frankly, if they would tone that down a little bit.”
In a wide-ranging conversation, Mr. Posen said services in trade may emerge as the next frontier for market-opening negotiations on the global stage.
“Most of all the trade agreements up until now, they were about goods,” Mr. Posen said. “They were about manufacturers, and cars, or stuff that goes in boxes. But there’s a whole world of services that’s not freely traded.
“I think during the second term of the Obama administration, whoever is picked to be the new trade ambassador is probably going to push that.”
Since the financial crisis, there has been a big push toward austerity measures, particularly in countries such as Greece. But the prospect of countries in the developed world pursuing austerity programs could leave the global economy with far fewer sources of growth and prosperity.