Tags: reich | banking | rules | overseas

Reich: Extend US Banking Rules to Overseas Branches

Wednesday, 20 June 2012 09:39 AM

The U.S. needs to extend regulations applied to its financial institutions to include their overseas units, says Robert Reich, who served as Secretary of Labor under President Bill Clinton.

JPMorgan recently announced it lost $2 billion in a botched trading strategy out of its London unit, where regulations outlined under the Dodd-Frank financial reform law don't apply.

It's time they do apply, Reich says, or if not, then big U.S. banks need to be broken up if they want to make risky bets abroad.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Otherwise, large U.S. banks can engage in risky business around the world, build stronger ties with their now-shaky European counterparts, threaten the global financial system and later leave American taxpayers bailing them out when things don't go as planned.

"Unless the overseas operations of Wall Street banks are covered by U.S. regulations, giant banks like JPMorgan will just move more of their betting abroad — hiding their wildly-risky bets overseas so U.S. regulators can’t control them. Even now, no one knows how badly JPMorgan or any other Wall Street bank will be shaken if major banks in Spain or elsewhere in Europe go down," Reich writes in his blog.

U.S. banks, meanwhile, have called for less regulation in Europe as well, which further puts the American taxpayer at risk.

The Dodd-Frank financial overhaul law, passed in the wake of the Lehman Brothers collapse, gives the Federal Reserve and other institutions greater say on bank capital requirements, liquidity levels and risk-management practices and would also ban banks from trading their own money for profit in capital markets.

The solution, Reich writes, is to extend those tough regulations to overseas units or break up big banks by not allowing commercial and investment banking services to operate under one roof.

"Wall Street can’t have it both ways — too big to fail, and also able to make wild bets anywhere around the world," Reich writes.

"If Wall Street banks demand a free rein overseas, the least we should demand is they be broken up here." 

Other public officials have called for a breakup of big financial institutions on the grounds that not only are big banks hard to manage, they don't add much value for shareholders, anyway.

Breaking them into smaller and more valuable pieces would benefit all involved and create a more efficient financial services industry, Sheila Bair, former head of the Federal Deposit Insurance Corporation, writes in a recent Fortune column.

"Whatever economies the megabanks achieve from their size are more than offset by the challenges in managing trillion-dollar institutions that are into trading, market making, investment banking, derivatives, and insurance, in addition to the core business of taking deposits and making loans," Bair writes.

"This is one of the reasons why, even before the crisis, their shares performed more poorly than those of the well-managed regional banks, and continue to do so."

Smaller banks would add more value for shareholders and the country as a whole.

"Let's face it, making a competitive return on equity is going to become even harder for megabanks as their capital requirements go up, their trading and derivatives activities are reined in, and their cost of borrowing rises as bond investors recognize that too-big-too-fail is over."

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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Wednesday, 20 June 2012 09:39 AM
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