From a recent NY Times article about WTO financial services rules:
Back in the 1990s, when many in Washington — and virtually everyone on Wall Street — embraced the deregulation that helped lead to the recent crisis, a vast majority of W.T.O. nations made varying commitments to what’s called the financial services agreement, which loosens rules governing banks and other such institutions.
Many countries, for instance, said they would not restrict the number of financial services companies in their territories. Many also pledged not to cap the total value of assets or transactions conducted by such companies. These pledges also appear to raise trouble for any country that tries to ban risky financial instruments.
According to the W.T.O., 125 of its 153 member countries have made varying degrees of commitments to the financial services agreement. Now, these pledges could easily be used to undermine new rules intended to make financial systems safer.
What would happen if a country flouted the rules in an attempt to reduce risks in its financial system? Possibly nothing. Then again, that country could find itself subject to a challenge by the W.T.O.
So far, no countries have asked the organization to challenge rule changes like those made in the United States under the Dodd-Frank law. But rumblings of such an objection emerged in late December, in a comment letter sent to United States banking regulators. That letter criticized elements of the Volcker Rule, which is intended to prevent financial companies from making bets for themselves with deposits backed by taxpayers.
The letter was written by the Investment Industry Association of Canada. It called the proposal “an unprecedented reach of extra-territorial regulation.”
The letter went on: “As a result, the Volcker Rule may contravene the Nafta trade agreement,” a reference to the North American Free Trade Agreement, which has a broadly similar set of rules to the financial services agreement under the W.T.O. While countries must ask the W.T.O. to mount a challenge under its rules, companies can do so directly under Nafta.
Some countries that are trying to reregulate their financial systems worry that they may run afoul of trade commitments. The delegation for Barbados, for example, wrote last year about the trouble it might encounter imposing new rules while trying to abide by trade agreements.
“The notion of ‘too big to fail’ has been a concern even prior to the crisis, but the financial crisis realized banking regulators’ worst fears,” Barbados wrote to a W.T.O. committee in early 2011.
Yet nations that committed to the agreement in the 1990s “may find restrictions on size are contrary to the commitments given to limit adverse affects on financial service suppliers,” the Barbados letter said.
Barbados suggested amending the agreement on financial services to provide more flexibility. Its proposal was rejected.
Last October, Ecuador asked that the W.T.O. review financial rules so that the country could preserve its ability to create regulations that ensure “the integrity and stability of the financial system.”
Sounds reasonable enough. But that proposal was rejected by trade representatives for the United States, the European Union and Canada before it could be discussed at a December meeting in Geneva. Through a spokeswoman, Ron Kirk, the United States trade representative, declined to comment.
Maybe nothing will come of any of this. But such trade agreements might well be read as an invitation to fight financial regulation.
Keith Rockwell of the WTO responded with the following:
The [WTO financial services] agreement is about opening markets, not tying governments’ hands when it comes to regulating their financial services sectors.
The most important elements of the W.T.O. commitments on financial services pertain to nondiscrimination and national treatment, meaning that if you accept opening your market, you may not apply different regulations to banks from different foreign countries or to your local banks. Open trade in financial services does not mean greater risk to the system’s safety and soundness.
The Barbados letter is here: www.wtocenter.org.tw/SmartKMS/fileviewer?id=115488 One thing it says is: "According to GATS Article XVI, governments cannot prohibit or limit the size or the total number of financial service suppliers in covered sectors. However, under a Financial Reform Bill 2010, an oversight entity is to be set up to do exactly that in one jurisdiction, that is, to make sure that the size of banks is reduced if they appear to be becoming too large." GATS Article XVI says:
2. In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule, are defined as:
(a) limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;
(b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;
(c) limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test; ...
Of course, the Annex on Financial Services has this "prudential carve-out":
2. Domestic Regulation
(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement.
The Barbados letter says the following on this language:
11. One might argue that there is a prudential carve-out. However, the GATS Annex on Financial Services require that measures imposed must not be used as a means of "avoiding the Member's commitment or obligations under the agreement." However, an obligation not to restrict financial services in a situation where a Member wishes to do so, could be interpreted as having the intention of avoiding that obligation. It would seem that the wording of paragraph 2 of the GATS Annex on Financial Services may need to be amended.
...
23. It has been suggested that the prudential carve-out in the GATS permits Members to take action on the grounds that such action is prudentially required. However, there are some aspects to this which bear further examination. Firstly, when there is an increasing number of exceptions being introduced on prudential grounds, then this may be a sign that the basic rules need to be addressed. Secondly, while the prudential carve-out may permit countries to breach their commitments; the fact is that they have breached their commitments, - albeit with permission. It may be possible to argue that they are not in contravention of GATS, but they have reneged on the commitments given. In the case of the Understanding, it is a little more difficult for Members, since there is a proviso that their actions must not be used as a means of avoiding commitments on obligations. This may well be exactly what they wish to do in light of recent painful experiences caused by certain types of activities.
I talked about the prodential carve-out here: http://worldtradelaw.typepad.com/ielpblog/2010/05/global-trade-watch-on-the-prudential-carve-out.html Is there a need to revise WTO rules in this area, either the obligations or the prudential "exception"? How much of a problem would it be to undertake non-discriminatory financial regulation consistently with WTO rules?
