Terence Corcoran

Bankers’ battle highlights regulatory risks to global economy

The Mark Carney vs. Jamie Dimon matchup looks like fun. Too bad nobody got to see the fisticuffs. The headlines are certainly hot: The JPMorgan Chase CEO is said to have delivered a “tirade” and “attack” that “roasted,” “ripped” and “lashed” the governor of the Bank of Canada. Unfortunately, the actual words used by Mr. Dimon at a closed-door meeting in Washington last Friday were not reported by the Financial Times, which originated the story. All it said was that Mr. Dimon had complained that new bank rules proposed by the Basel III regulatory festival were bad for U.S. banks and he would continue to call them “anti-American.” Some lashing.

It would be surprising, however, if Mr. Dimon did not have a few choice words to say about the Basel III bank reforms and other regulatory initiatives championed by Mr. Carney. The Bank of Canada governor is a tireless and voluminous generator of global bureaucratese on the subject of bank regulation and the wonders of Basel, the G20, the Financial Stability Forum and macroprudential regulation. Most of it is beyond the ken of mortals not blessed with a willingness to put up with haze-inducing flabberwagging. A couple of days after allegedly having had Mr. Carney against the ropes, Mr. Dimon would have had to endure a speech from Mr. Carney at a meeting of the world’s top bankers in which, among other things, Canada’s top banker said:

In addition, policymakers are significantly enhancing the mutual-surveillance processes that each jurisdiction accepts as part of its membership on the Basel Committee on Banking Supervision (BCBS). In particular, the Financial Stability Board (FSB) and the standard-setting bodies, including the Basel Committee, are jointly developing an implementation-monitoring framework that will co-ordinate activities and include annual progress reports on a country-by-country basis to the FSB and G-20, as well as less frequent, but more in-depth, peer reviews. Ad hoc reviews of new legislation and regulations could also be conducted. In this regard, a review by the BCBS of new European and American rules would be welcome to build confidence today in the consistency of application in major jurisdictions.

This is the central-banker view of the world, the know-it-all top-down political perspective that fills the global economy with frameworks and implementation bodies that clog the financial system and can create paralysis. Basels past helped underwrite the crises of the past and currently appear to be undermining economic activity and laying the seeds for future crises. Bankers around the world, not just Mr. Dimon, are fighting back against what looks like a bout of regulatory overkill.

Canadian bankers have been on the same case. Just last Friday, Scotiabank CEO Rick Waugh lit into Basel on BNN. He suggested that the Basel I and Basel II structures — established by the 10 central bankers (including Canada) that run the Basel Committee on Banking Supervision in Switzerland — have a bit of a history of backing rules that create their own form of havoc. Basel rules for securitization proved to be flawed. The 2004 Basel II established capital-risk rules that said banks could hold sovereign debt at zero or minimal risk, depending on rating-agency norms, which is why many banks hold so much sovereign debt and the world is currently in a sovereign-debt crisis.

Mr. Waugh’s comments may not rank as a “tirade” or a “lashing,” but he is making some of the same points that are being made by Mr. Dimon. To some extent, Mr. Dimon has a specific and seemingly justifiable beef with Basel’s attempt to impose a “capital surcharge” on banks that are considered too big to fail. This idea, supported by the Bank of Canada, was given a fresh boost on Monday by Canada’s top regulator. Julie Dickson, Ottawa’s Superintendent of Financial Institutions, said such a surcharge was necessary to bring discipline to “Global Systemically Important Financial Institutions,” a category that is certain to capture Mr. Dimon’s bank but not, for example, Canada’s banks.

But there’s more than simple national self-defence in Mr. Dimon’s run at regulation. In his view, echoed by bankers around the world, the expanding regulatory regimes promoted by Mr. Carney and his regulatory associates are making a bit of mess of economic policy and bank regulation. In an earlier attack on regulatory expansionism, Mr. Dimon told the Financial Times:

We’re all simultaneously working on understanding and complying with Basel III rules, liquidity rules, operating capital rules, derivatives rules, Volcker rules [that ban proprietary trading], cash flow rules, Durbin rules [which limit debit-card fees charged to retailers], disclosure rules, consumer rules. I do feel all of these things together are slowing recovery, but I can’t prove it. I think that market participants are overwhelmed by the amount of regulation and change being imposed at one time.

Basel is only one part of an onslaught of national and international rules. The Dodd-Frank regime in the United States has been widely credited with setting up roadblocks to growth. In the United Kingdom, the Vickers report — described by Neil Mohindra in an accompanying commentary — promises to raise costs to the industry by £7-billion ($11-billion) and drive bankers out of Britain, where job growth in the industry is already crashing, with 35,000 layoffs pending and hiring in a state of collapse.

In there’s anything to this battle between Mr. Carney and Mr. ­Dimon, it appears to be overdue. Rematch!