Financial regulation "new consensus" still failing to pierce WTO rules (April 2012)

Rethinking Bretton Woods | Mon, Apr 30, 2012

By Aldo Caliari

The International Working Group on Trade-Finance Linkages cosponsors a side-event to the UNCTAD XIII Conference, Doha, Qatar, with a focus on the coherence between financial re-regulation and global trade rules.

The coherence between financial re-regulation and global trade rules was the central theme of a side-event held on April 24, 2012, in the occasion of the UNCTAD XIII Conference, Doha, Qatar. Panelists from government, civil society and academia provided their perspectives at the event that was co-organized by the International Working Group on Trade-Finance Linkages, the Our World Is Not For Sale network and Public Citizen.

The moderator, Aldo Caliari, from the Washington DC-based Center of Concern, introduced the panel by laying out the concerns that had led co-organizers to have an event with this focus. The rules in the World Trade Organization (WTO) that apply to trade in financial services were developed at a time when there was a prevailing consensus on the benefits of financial liberalization and de-regulation. Rules that were as non-interfering as possible with the works of the market were seen as the preferred outcome. The assumption was that market actors, by pursuing their own interests, would guarantee the achievement of the public good of financial stability.

The financial crisis of 2008-09 has led to a new consensus on the need for re-regulation of the financial sector as an unavoidable requirement to guarantee financial stability. In line with this consensus, several policy tools that governments need to employ for the task have become widely accepted in the regulatory community. “We are concerned that the rules developed under the old consensus may clash with countries’ need to implement measures that are part of the new one,“ said Mr Caliari. “We have, in fact, collected evidence that existing trade in financial services rules could hinder the ability of countries to impose capital controls, measures to prevent financial firms from becoming “too big to fail” or to resolve them in an orderly way when they are operating across-borders.”

In his intervention, Alfredo Calcagno, staff at UNCTAD, outlined the macroeconomic consequences countries could face if deprived from space for policies needed to regulate their financial sectors. “A whole range of measures needed to avoid crises or make them less severe and costly, would be out of reach for countries that undertook to liberalize their financial services in the framework of the General Agreement on Trade in Services (GATS) or other agreements (such as bilateral investment or trade treaties)," he emphasized.

Clear examples of where the clash of norms and policy measures could occur were provided by Melinda St. Louis, of Public Citizen. Capital controls can take many forms, such as restrictions on payments and transfers for current international transactions. They could also take forms less directly associated with the immediate payment for goods and services, such as taxes, restrictions, or prohibitions on debt and investment flows. “If countries took commitments in financial services sectors, capital controls could be subject to challenge in WTO dispute settlement procedures,” Ms St. Louis stated. It is worth noting that the International Monetary Fund protects, in its Articles of Agreement, the right of members to impose such measures. While some experts have argued that this is not an issue because financial services sectors of member countries are not automatically subject to liberalization under GATS, absent voluntary commitment in a bilateral process of request and offer, already 46 developing countries have made significant commitments in these sectors which could inhibit the use of capital controls. Moreover, “it is problematic that many of these commitments were made before countries were aware how necessary for financial stability such capital controls might be,” she explained.

The constraints that GATS rules present for other measures in the spectrum of financial regulation were developed by Prof Jayati Ghosh, of International Development Economics Associates. The belief that foreign banks would bring about reduced costs for consumers has not materialized, according to Ghosh. On the other hand, foreign banks had brought their own set of difficulties, as regulators in developing countries have a hard time trying to monitor large and complex financial institutions. In considering whether certain regulations are the best alternative for a country, one has to account for the more limited size of the regulatory apparatus in developing countries. “Often, the best options may be tools that are simpler to implement, such as bans on certain types of financial activity - even if they may not be the sophisticated tools that a developed country might use instead. But the rules on financial services are based on the assumption that regulators in different countries do not differ in terms of their capacities to deal with large and transnational financial institutions,” she said.

Indeed, it was clear listening to Ms Cristina Pasin, from the Central Bank of Argentina, that there was no shortage of practitioners’ experiences to illustrate the difficulties that regulators face in trying to regulate while navigating complex financial services commitments. Capital controls, for instance, may be necessary to counter hot money inflows in good times. However, “the exceptions allowing capital controls tend to assume a balance of payments crisis situation,” Ms Pasin said, adding that “by the time you have to implement such measures, it is by definition too late, and you have missed the chance to avert the crisis.” Indeed, many precautionary measures needed to protect depositors or preserve financial stability may be taken absent impending threat of a balance of payments crisis. That does not make such measures less necessary or less warranted.

In spite of the critical need for revisiting financial services rules having in mind the requirements of a new financial regulation global scenario, it is still unclear how such revisiting process might take place in practice. Ms Pasin shared her skepticism on whether a revision of the existing trade in financial services rules might be possible, given that it will require rewriting of commitments that several countries will find unacceptable. More feasible it might be to call for a liberalization impasse, where at least no new commitments are offered or requested, and complementary seeking some memorandum where space for regulatory measures by countries that already have committed sectors is better protected.

Addressing one practical avenue for achieving the needed coherence between financial services rules and financial regulation, Mr. Juan Manuel Escalante, one of Ecuador’s delegates before the World Trade Organization (WTO), spoke of the efforts that Ecuador has undertaken in the last two years to have the Committee on Trade in Financial Services of the WTO carry out a review of the current rules. “While the request in the end was not approved (for a Ministerial mandate in MC8), the issue has not been dismissed, and remains as an item for discussion in the Committee on Trade in Financial Services this year,” Mr. Escalante reported.