Banking Proposals in United States and Britain Threaten Growth

December 10, 2013

New banking proposals in both the United States and United Kingdom threaten global growth, say Louise Bennetts, associate director of financial regulatory studies at the Cato Institute, and Arthur Long, a partner in the New York office of the law firm of Gibson, Dunn, and Crutcher LLP.

The United States and the United Kingdom have proposed new banking plans, each with the goal of protecting the nations from the failure of global banking operations that operate within their borders. However, the proposals are ineffective and unlikely to prevent any future financial crisis. In fact, Bennetts and Long say that had these proposals been in place at the time of the financial crisis, the countries would have seen even worse outcomes.

  • The "Foreign Banking Organization" proposal (FBO) in the United States would apply to foreign banking organizations that have a branch or own a U.S. bank or subsidiary in the United States. The FBO would apply portions of the Dodd-Frank law to those foreign banks.
  • The United Kingdom has a "ring-fencing" plan which would have UK banks handle traditional banking activities (deposits, overdrafts, etc.) in separate subsidiaries, which would have independent boards and be required to meet higher capital requirements.

Both proposals will have adverse effects on credit availability, global capital flows and the world economy as a whole. Moreover, these types of large-scale restructuring rules are very expensive and time-consuming. If the programs fail, they are difficult to undo. It would be better to do nothing than to institute these new measures.

Source: Louise C. Bennetts and Arthur S. Long, "The New Autarky? How U.S. and UK Domestic and Foreign Banking Proposals Threaten Global Growth," Cato Institute, November 21, 2013.

 

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