A Global Solution for Cross Border Financial Resolutions

 

The risk to small countries who host financial centres, such as Ireland, Luxembourg, and many of the British offshore centres and Crown dependencies such as the Channel islands is currently in vogue, as it is with regulators in larger centres, as evidenced by a report just published by the Institute for International Finance, which puts the issue at the very top of their agenda.

With regulation officially at the top of the agenda at the Toronto G20 summit, the issue also should bear attention there.

Peter J. Wallison believes he has a fix, and in an interview with the editor of Financial Centres International, he sets out his solution, an idea that, had it existed when Lehmans failed, would have saved a lot of bother, and would eliminate a major part of the transnational risk that regulators now worry about, and which threaten the globalisation of finance, and even raise the spectre of a return to the financial autarky (that Keynes, among others, contemplated in the 1930s).

The problem is that bankruptcy systems are territorial and national, given the traditional jurisdiction of bankruptcy courts. When banks are in difficulties, it becomes reminiscent of the desparate observation of the Icelandic Prime Minister memorably on the night of Iceland's demise, "it's every man for himself".

To counter this, Wallison proposes what he calls a "debtor selection system". It has the merit of simplicity, and workability. Once established, by an internaitonal protocol, he believes, financial centres around the world would feel compelled to comply, and a domino effect across international boundaries and regions of all kinds could see the system established. . . .

The full text of this interview is available as an Adobe Acrobat PDF.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at AEI.

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