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Banking Separatism Is Not in US Interests

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abstract Sir,

Thank you very much for Mr Hoenig’s thought provoking comments on the need of financial sector reform (Why the sign must say: no UBS in the US, Financial Times, June 17, 2011). While I share Mr. Hoenig’s fear about the relative advantages and disadvantages in the global financial system, I do not share his conclusion that it is in the interest of the US to exclude foreign banks for the following four reasons:
First, shutting out international competitors will ceteris paribus limit the numbers of banks active in the US. Resting US financial markets on fewer shoulders will increase the systemic relevance of US banks, which will in the long run increase not decrease systemic risks.
Second, UBS had to be bailed out in 2008 mainly due to the bank’s high exposure to US subprime markets. The fact that the Swiss government rescued UBS by setting up a stability fund of $40 means that Switzerland has been importing risks from US financial markets, not exporting risks to the US. Excluding foreign banks from US financial markets will prevent this kind of global risk sharing and therefore increase the liabilities of US tax payers.
Third, shielding the US banking sector from foreign competition until the introduction of new rules, makes reforms less likely since US banks will be incentivized to lobby against any legal change so as to not lose government protection.
Fourth, the implementation of protectionist policies implies dangers that other countries might retaliate by closing their financial markets to US banks. Shutting accesses to foreign capital markets is clearly not in the interest of an economy that is a net borrower of funds, like the US.
In light of these considerations, integrative approaches such as a global regime for large banks as currently discussed by international regulators, seem to be more promising than policies that favor protectionist separatism.

Camillo von Müller
St. Gallen, Switzerland
   
type article
   
keywords Financial Regulation, Financial Crisis, Risk, UBS
   
language English
date of appearance 21-6-2011
journal Financial Times Europe
publisher Financial Times (London)
ISSN 0307-1766
number of issue 37649
page(s) 10
citation von Müller, C. (2011). Banking Separatism Is Not in US Interests. Financial Times Europe, 37649, 10.