Forum shopping

The Financial Times reports that Oswald Grübel, chief of the Swiss bank UBS,
“…has attacked the UK government for its public neglect of the City of London, warning that tougher regulations will see Britain and the rest of Europe cede investment banking business to Asia and the US.”

Yes, by all means, let’s not overdo the whole regulation thing.

Grübel’s is a tough argument to make in the wake of  a recent financial crisis that has caused so much economic misery–particularly for taxpayers.  The argument is especially unseemly given that the crisis has been deservedly blamed, at least in part, on the absence of stringent regulation.

Anti-regulation whining is not new, of course.  American financial institutions lobbied heavily for deregulation for years, typically arguing that excessively stringent regulation : (1) makes US financial firms less competitive; (2) drives business overseas; or (3) both (1) and (2).

I’m not arguing for a return to the “lockdown” that characterized the financial world  between the Great Depression and the 1970s, but the pressure to deregulate right now is completely wrongheaded.

Grübel added: “If in one part of the world you have an 8 per cent capital requirement, and in another part of the world a 19 per cent … you don’t have to threaten, you know where the business is going.”  He is no doubt right (although it sounds like he is threatening anyway).  Bankers–like the rest of us–follow incentives.  If only we could somehow instill in bankers an incentive to avoid the excesses that led to the financial meltdown.

How should policy makers respond?  By increasing regulatory harmonization–of the type that the Basel Accords are supposed to promote–in order to discourage the threatened  regulatory forum shopping and its accompanying race to the bottom.