WTO compatibility of Dodd-Frank financial regulation questioned
Late last year, Barbados raised questions about the GATS compatibilty of U.S. financial regulation efforts at the WTO, according to documents that have recently been released.
The island nation questioned how the GATS would intersect with nearly a dozen re-regulatory efforts by various countries. But, according to the minutes of the December 20, 2010 meeting where this came up, only the United States and EU reregulatory efforts were mentioned by name. This is very significant, since WTO delegations are typically loath to mention countries by name in these settings.
The delegate from Barbados argued the following:
As part of the remedial measures put in place in the aftermath of the crisis, one was the banning of naked short selling – a measure introduced in May 2010 by the German Financial Regulator (BAFin), which enacted a ban on naked short selling of credit default swaps on Eurozone government bonds. However, under the GATS, a Member should not normally ban a highly risky financial service if it had made specific commitments relating to that sector. Similarly, the new financial regulatory reform bill passed in the United States Senate in May 2010 included a provision that would force some of the biggest banks to spin off their trading in swaps into special subsidiaries or be denied access to the federal emergency lending window. Another initiative included making credit default swaps available only to people who own the underlying debt. However, Members with specific commitments in the sector ran the risk of contravening those commitment if they imposed limits on the types of financial services which an entity may provide, except under permitted circumstances...
The notion of too-big-to-fail had always been a concern, but the current financial crisis confirmed the regulators' worst fears. The question had arisen lately as to whether the rules should vary according to the size and level of sophistication of the financial entity. Regulators had been moving in this direction lately. Other proposals for enhanced regulation included the suggestion to set up a mega regulator, which would oversee individual regulators at the national level. The powers of enforcement of such a mega regulator and the power to impose sanctions would need to be carefully considered, so as not to endow an institution with excessive power. According to GATS Article XVI (Market Access) governments cannot prohibit or limit the size or the total number of financial service suppliers in covered sectors. However, under the new US Financial Reform Bill 2010, an oversight entity would be set up to do exactly that, that is, to make sure that the size of banks was reduced if they appeared to be becoming too large.
Thankfully, Barbados appears to be raising these issues not as a precursor to a WTO dispute case, but instead in the spirit of proposing amendments to the GATS. Just some of the nearly dozen reforms they propose:
- Rolling back the "standstill" on new regulations envisioned by the Understanding on Commitments in Financial Services.
- Expanding the circumstances under which countries can be allowed to use capital controls without running afoul of their GATS commitments.
- Amending the market access provisions of the GATS so that regulatory bans and size limitations can be utilized.
- Amending the GATS terms that require compensation following a withdrawal of commitments, because the GATS can make "the securing of financial stability very costly."
The WTO's Committee on Trade in Financial Services will be taking up Barbados' proposal at their next meeting, so stay tuned.