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protection, not protectionism September 1, 2009

Posted by Bradley in : financial regulation , trackback

In today’s New York Times, Daniel Price writes about an increase in protectionism, focusing in particular on protectionism in the financial markets. The specific examples he gives seem to be all about EU rules (although there is a reference to “several countries” (not named) having taken steps to “increase domestic lending at the expense of cross-border lending”). Now, in the context of a global crisis where defects in US policy and regulation were significant causal factors I have some sympathy for protective, if not protectionist, impulses.

But I think the EU examples don’t reflect so much European protectionism as a European negotiation with the market. Before the crisis, Commissioner McCreevy was a noted proponent of better regulation. The crisis changed the world, but perhaps not really so much in the context of technical rules of financial regulation. Rather than European clearing of credit default swaps just being a matter of European rules imposed on the markets by protectionist regulators, the new clearing system reflects a negotiation between the Commission and market participants:

In response to the Commission’s call for central clearing of credit default swaps (CDS), ten major dealers committed to clear CDS on European reference entities, and indices based on these entities, through one or more central counterparties (CCPs) established and regulated in the European Union by 31 July 2009. The Commission has set up a working group, involving dealers, the buy-side (e.g. banks, insurance companies and funds), CCPs and supervisors, to monitor the orderly roll-out of this commitment.

Market participants responded to an invitation by the Commissioner. OK, there was a big stick in the background, but the result was not just a matter of protectionism.

The EU’s proposals to regulate credit rating agencies, also referred to in the article, developed over time, and as the result of energetic lobbying about the ratings business being a global business (in fact dominated by three large US raters) and the need for the EU to back off its original position. The requirement for ratings developed by non-EU raters to be endorsed by EU-based entities doesn’t apply to smaller non-EU firms ( a certification system will apply to such firms instead). The details are still being worked out, but the story is at least as much an example of a victory for harmonization rhetoric, as it is an example of protectionism.

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