IT’S not just free trade that has driven the global economy over recent decades. It is also the free movement of capital. The ability of money to flow across borders means savers can invest money where it gets the highest returns, and businesses have access to a wider pool of investors, lowering the cost of setting up new factories, and pushing down the prices of goods. Countries with a surfeit of savings (like China or Belgium) can invest money in those with a shortage (like the US or the UK). The abolition of capital controls has been as important to economic growth as lowering trade barriers.
Capital controls are not returning, but the movement of capital is facing new restrictions. Regulators are setting up barriers to ensure that capital and liquidity doesn’t cross borders. Although the controls are well-intentioned, the consequence will be banks that are less stable and lower economic growth.
The adage is that banks are international in life and national in death: when things go wrong, home regulators foot the bill. To protect themselves, governments are increasingly insisting that global banks retain capital within their national borders. The US is planning to require that US-based operations of global banks be subsidiarised with a separate holding company, with its own capital and liquidity. Regulators in the UK, Switzerland, Poland, Singapore and beyond are taking measures that restrict capital movement across borders.
In Washington last week, some US regulators told me they were doing it because other countries are doing it. But other regulators are concerned. One said: “you are right to be worried. It will trap pools of capital and liquidity in individual countries. It reduces the flexibility of banks and regulators to respond in a time of crisis.” The problem is that a global bank may have plenty of capital, but it will be unable to rescue national operations in difficulty. It will also raise the total capital levels that banks have to hold, above and beyond Basel III requirements.
Fragmentation is already occurring. Global banks are scrambling to match funds within national boundaries, raising local bonds for local debts. In the Eurozone, cross-border interbank lending has fallen from a third to a quarter of the total, similar to the level before the euro was created. The single market in capital is in retreat.
Even as the rules are introduced, there is growing recognition among some authorities of the problems. Mark Carney has warned that de-globalising finance will hurt growth and jobs by “reducing financial capacity and systemic resilience.” Mario Draghi, the president of the European Central Bank, has talked of the need to “repair this financial fragmentation”.
Mandating higher levels of capital and liquidity strengthens the resilience of banks, and there is also a case for ring-fencing core domestic banking businesses, as the UK government is introducing (and which we support). But the creeping introduction of barriers to global banks moving capital across borders will harm the world economy, not help it.
Anthony Browne is chief executive of the British Bankers’ Association.