Bankers with Borders

Bank regulators in the US and the UK are determined to require foreign banks to establish local, separately capitalized subsidiaries, in order to avoid being left holding the bill when parent banks' local losses pile up. But there is a risk that these interventions are the thin end of a dangerous wedge for the global economy.

LONDON – When Mark Carney replaces Mervyn King as Governor of the Bank of England in July 2013, the world will be deprived of King’s witty public utterances. My personal favorite came when, commenting on strong retail-sales figures during one Christmas period, he cast doubt on their significance for assessing the state of the economy. “The true meaning of the story of Christmas” he solemnly intoned, “will not be revealed until Easter, or possibly much later.” A new career on the stage, or in the pulpit, surely beckons.

King’s most quoted phrase is that “global banking institutions are global in life, but national in death.” They trade globally, across porous borders, attaching little significance to the geographical location of capital and liquidity. But, when the music stops, it is the home regulator, and the home central bank, that picks up the tab, even if the losses were incurred elsewhere. By the same token, a failing bank may leave behind a mess in third countries, which its home authorities may not clean up.

Icelandic banks, for example, took deposits in the United Kingdom and the Netherlands, and swept them back to Reykjavik, leaving the host countries out of pocket. Likewise, the collapse of Lehman Brothers left European creditors more exposed than those in the US, whose funds had been wired home to New York on the Friday before the end.

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