Christine Lagarde gets tough on Wall Street

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

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