Christine Lagarde gets tough on Wall Street

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SummaryLagarde: The minute the situation improves, people tend to forget the hard times. It is the job of policymakers to realise this, and thus avoid a relapse of 2008.

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. “It’s 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 capital—how 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.”

Lagarde’s second worry is what she called “forum shopping” or “fragmentation.” This is the Gerard Depardieu story on an institutional level. Just as today’s globalised world allows the French actor to cross borders and trade passports to escape high French taxes, 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 Lagarde’s comments. Before 2008, a lot of people—politicians, journalists, regulators—conflated the two. Particularly in the United States and in Britain, General Motors chief Charlie Wilson’s 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 world’s most important public global financial institution. When most of us think of the IMF at

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