Christine Lagarde gets tough on Wall Street

Written by Reuters | Updated: Jan 24 2013, 06:41am hrs
Chrystia Freeland

Watch outWall Streetand look sharp, City of Londonone of the sheriffs of global capitalism is riding into town. An elegant Frenchwoman with a shiny silver bob and the smooth manners of a veteran Cabinet minister and white-shoe lawyer, Christine Largarde, the managing director of the International Monetary Fund, doesnt conform to the most common stereotypes of a tough law enforcer. But, on the eve of the World Economic Forumthe chummy annual gathering of the worlds business elites in Davos, SwitzerlandLagarde delivered a strong call for firmerfinancial regulation around the world.

Speaking at a news conference, Lagarde decried the waning commitment to tighter financial regulations and said that finishing the post-2008 effort to fix the worlds banks should be one of the three economic priorities in 2013. In an interview afterward, Lagarde elaborated on the theme, warning that robust lobbying threatened to weaken the efforts byregulatorsand legislators to force banks to hold more and better capital against their loans and to be more transparent.

I see a lot of pressure coming out of the industry, she said. A former corporate lawyer, Lagarde isnt naive about that muscular lobbying, or unsympathetic to its motivations. It is, she said, clearly part of their jobs. They will naturally lobby to support more flexible, more accommodating regulations.

But because of the special role offinancein theeconomyincluding the special support the state gives banks in times of troublethe sector warrants stronger regulation and stronger buffers against potential risks and regular tests of their capacity to resist shocks. We believe, Lagarde said at her news conference, that it is important for regulators, for supervisors, for authorities to resist aggressive industry pushback.

In our conversation, Lagarde was quick to rebuff some of the bankers arguments against stronger financial regulation. When I asked her whether the weak world economy was a reason to delay tougher rules, she was uncompromising, repeating her point twice for emphasis: Its always the wrong time here. Its always the wrong time.

She was equally firm when I ventured the complaint of some US banks that the contested Basel III regulations that set rules for banks around the world were anti-American and placed an unfair burden on US Companies. You know, when I was sitting on the other side of the pond, I heard exactly the same story from the European banks, that it was anti-European and overly pro-American, Lagarde said. So Im sure there must be something right about it. I think the Basel committee is trying to do as good a job as it can and is trying to resist the pressure. I certainly hope that it continues doing so.

It is just a little more than four years since a financial crisis ripped apart the world economy, destroying millions of jobs and stunting millions of lives. Those wounds are still so fresh that you may be surprised to learn that banks, whose risky behavior caused the crash in the first place, would be putting up much of a fight at all against tighter rules. Its human nature, Lagarde told me. The moment the situation improves, you tend to forget about the hard times. And on this occasion, I think it is the job of policymakers, of supervisors, of regulators to constantly have that in the back of their mind and as an objective to avoid a relapse of what happened back in 2008.

The major current battle is about capitalhow much banks should hold and how liquid it should be. Lagarde sees two other big fights in the offing. One is the regulation of so-called shadow banking, the vast world of financial transactions that are done outside open exchanges, hidden from public balance sheets or conducted by nonbank financial institutions. Shadow banking is clearly developing at a steady pace, Lagarde warned in our interview, and currently escapes a degree of regulation and supervision.

Lagardes second worry is what she called forum shopping or fragmentation. This is the Gerard Depardieu story on an institutional level. Just as todays globalised world allows the French actor to cross borders and trade passports to escape high Frenchtaxes, global financial institutions can shop for the national home base that provides the lightest regulation. But while that may be good for individual bankers and their firms, it is dangerous for the world economy.

This distinction between what is in the interest of the banks and what is in the public interest was at the heart of Lagardes comments. Before 2008, a lot of peoplepoliticians, journalists, regulatorsconflated the two. Particularly in the United States and in Britain, General Motors chief Charlie Wilsons argument that what was good for GM was good for America started to feel true about the economic powerhouses on Wall Street and in the City of London.

Lagarde runs the worlds most important public global financial institution. When most of us think of the IMF at all, it is usually as the stern enforcer of the sometimes harsh rules of international capitalism. Thats why we should take Lagardes call for tougher financial regulation particularly seriously. My hope is that its improved for the public interest, not for the banks interests, she told me. And those are not necessarily one and the same I asked. She responded definitively and with a warm laugh: Of course not!