Editorial: International cooperation key for taking on banks

The US has overtaken Europe when it comes to financial regulation. International coordination is required to properly regulate the banking industry.

More than 18 months after the fall of the US investment bank Lehman Brothers short-circuited the global financial system, the first major piece of legislation designed to prevent similar disasters is close to becoming law. On Thursday, the US senate approved a bill that seeks to implement far-reaching reform of the banking system.

A new federal US agency will be created to protect consumer interests in the financial sector. Oversight will be improved, procedures to quickly dismantle failing banks will be implemented, and the trade in financial derivatives will be made more transparent. Banks will also be required to draft emergency plans outlining how they should be dismantled if disaster strikes. Most importantly: banks entrusted with citizens' money will – for the most part – no longer be allowed to trade on their own dime.

The bill still needs to be incorporated into one already approved by the House of Representatives for president Barack Obama’s signature on July 4. Till then, anything can happen. But a framework has been established, and that is a welcome development indeed.

When it comes to regulating its financial sector, the US is well ahead of Europe, which finds itself in the middle of complex negotiations. The legal case against Goldman Sachs, and congressional elections scheduled for this fall, have worked wonders in maintaining pressure on American politicians to come down hard on Wall Street. In the EU, things are not so easy. Here, the continent often finds itself pitted against the United Kingdom, with its major financial sector and specific interests, notwithstanding the willingness earlier this week of the new British prime minister, David Cameron, to compromise on proposed regulations governing hedge funds.

National or regional initiatives to curtail the financial sector are inevitable. It would be impossible to create a new global system for regulation and have every parliament on the planet subsequently approve it. But even if regulation is established in a bottom-up process, international supervision remains desirable. Banks should compete on a level playing field, and national legislative and regulatory differences should not be exploited.

The G20 summit, which is scheduled to take place in Canada at the end of June, offers a perfect opportunity to compare plans and coordinate efforts. At the same time, capital requirements for banks will become more strict. That will happen at the so called G10 meeting in Basel.

Where determination was first lacking, a desire for quick and inspiring results now seems to be emerging, fuelled in part by the euro crisis. It is good that the process is picking up speed, but the risk now is that banks will soon find themselves inundated by a plethora of rules that will limit their capability to function properly. The financial sector doesn’t deserve a lot of sympathy. But it remains important to the performance of the productive part of the economy.