Lax oversight. Deregulation. “Shadow banking.” These are some likely responses an expert might give if asked what caused the 2008 financial crisis. In the years since the meltdown, there has consolidated in the public consciousness an image of the pre-crisis global financial system as a sort of Wild West, where greedy bankers, rather than reckless outlaws, operated with impunity, causing irreparable social harm. But there is now a new sheriff in town, with the letters “U.S.A.” boldly emblazoned on its badge. Determined to impose order on a once “lawless” system, the U.S. Federal Reserve and Justice Department are unilaterally playing the role of global financial cop, angering economic partners and threatening to undermine international cooperation.
It was not supposed to be this way. In the immediate wake of the crisis, the leaders of the world’s largest economies seemed to agree on the way forward: The global financial system could no longer be effectively managed at the national level alone. Coordination and harmonization of stricter regulatory rules at the international level was needed. The effort culminated in 2010 with the announcement of Basel III, a new set of global financial regulations that were to be implemented by national authorities over the subsequent five years. The agreement, designed to prevent future public bailouts of private financial institutions, required banks around the world to hold more capital in reserve and regularly conduct so-called stress tests to assess their vulnerability to various crisis scenarios.
The deal was hailed as important not only because it promised a world where financial institutions were held to the same high standards regardless of where they were operating, but also because it prevented any single country’s banks from gaining a competitive advantage over foreign rivals. The playing field, so to speak, was supposed to be level. At least that was the idea. It is becoming increasingly clear, however, that the U.S. is no longer satisfied with this approach. And by taking matters into its own hands, Washington is raising the ire of foreign banks and policymakers, especially in Europe.