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May 10, 2011

New memo on WTO conflict with measures to fight too big to fail banks

There are many ways that nations can check the growth of “too-big-to-fail” (TBTF) banks. One approach utilized in the past is adoption of firewalls between insurance firms, investment banks and commercial banks. This was used most famously in the United States through the Glass-Steagall Act from 1933 to 1999.

But various provisions of the World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS) pose constraints on the type of size limitations a country may use. This is not surprising, since elimination of U.S. firewalls was a top priority for big banks in the original Uruguay Round GATS talks.

Moreover, Article 13.4 of the Korea-U.S. Free Trade Agreement (FTA) contains virtually identical anti-size-limiting rules,  as have many bilateral FTAs since the North American Free Trade Agreement (NAFTA).

We've just uploaded a new technical memorandum on this topic.

Section I outlines the basic policy options and debates confronting policymakers who wish to solve the TBTF problem.

Section II outlines the relevant GATS (and by implication, FTA) rules, and their possible conflict with these TBTF policy solutions – whether in the form of firewalls, licensing procedures or outright size limits. Section III concludes by suggesting a number of policy fixes.

Finally, Appendix I looks at the negotiating history of what relevant financial policies the United States bound to the GATS, including records released in response to Public Citizen’s requests under the Freedom of Information Act (FOIA). These documents show the disconnect between key U.S. negotiators and regulators during the Uruguay Round and subsequent financial services talks as to the reach of the core substantive obligations of the GATS. Appendix II details how the U.S. administered Glass-Steagall, which is useful for determining the exact intersection with GATS rules.

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Todd Tucker

Due to a technical glitch, the version uploaded on May 10 was an earlier draft. The version now linked is the final version. The main additions are in Section II and Appendix I.

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