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The Bradfield Plan
Former General Counsel for the US Federal Reserve shares his plan for solving the banking crisis
Michael Bradfield presents his plan during the final day of the Salzburg Global Seminar session on ‘Financial Regulation: Bridging Global Differences’
By: Louise Hallman
Following the intense three days of presentations, debates and group discussions, there were some murmurings that little had been achieved during the Salzburg Global Seminar session on ‘Financial Regulation: Bridging Global Differences’ – not so says Michael Bradfield, SGS faculty member and former general counsel of the US Federal Reserve Board and Federal Deposit Insurance Corporation.
Over the course of the session, numerous suggestions had been made as to how to regulate the banks in order to avert another crisis as seen in 2008; splitting the banks up along host countries’ GDP, separating certain commercial and investment banking practices, encouraging banks to operate as subsidiaries instead of large international corporations. Bradfield, however, has an alternative suggestion.
Taking inspiration from the “very influential and very useful” debates during the session, on the final afternoon, Bradfield presented his (soon-to-be-re-named) ‘Bradfield Plan’ – separating the international and domestic banking activities of banks under different regulatory regimes.
Speaking later in the evening in the Max Reinhardt Library at Schloss Leopoldskron, home to the Salzburg Global Seminar, Bradfield explains his proposal in more detail.
“The Bradfield Plan is an attempt, in the light of the very interesting and comprehensive discussions we’ve had about the possibilities establishing a legal framework – a treaty or other international agreement framework,” explains the American lawyer, “for the conduct of financial supervision of banking organizations.
“It appeared to me from the conversations [during the session] that it would not be feasible to establish such an arrangement for a very substantial time in the future...I was seeking to find a way of establishing a framework that could be established more quickly than one that applied across the board to all banks in really all countries; so what I suggested was that the supervisory regime would apply only to the international operations, international business activities of banks, and thereby leave to domestic authorities full jurisdiction and no limitation on their application of their supervisory responsibilities with respect to the domestic activities of the banks.”
He continues: “You have to have an enforcement mechanism for this and what my suggestion...is that the International Monetary Fund (IMF) would have the responsibility for certifying the international activities of banks, conducted within the parameters decided in accordance with the rules and regulations adopted by the governing mechanism.
“And to provide some discipline, the Fund would bi-annually assess compliance. If a bank was not in compliance it would lose the ability to engage in international financial transactions, and all other banks would be obligated to block their transactions.”
But would this be enough? Given the recent case against Standard Chartered Bank, which saw it accused of enabling Iranian transactions banned under international sanctions, and the scandal concerning the fixing of the inter-bank lending rate (LIBOR), how would the enforcement mechanism ensure that all banks would comply and actually stop theirs and each others’ international financial activities?
“Well, they’re parties to the agreement, and will have agreed to do so,” states Bradfield, matter-of-factly.
But what would be the consequence for the banks’ non-compliance?
“I didn’t go so far as to assume that that would happen,” admits Bradfield, who acknowledges his plan is still in its early days.
“I would think that banks would be willing to do that because that protects the international environment in which they operated and they would be running counter to that.
“If they engaged in that activity, they too would lose their authority to deal and engage in international activities, which is terrible for a bank which is substantially engaged in that – to suddenly be inhibited would be a significant disaster. Its stock would plummet. The fear of the consequences would force banks to comply.”
Improving banking regulation is something Bradfield feels strongly about, calling it “a very important, useful, desirable objective.” His experience in the field is extensive, with his resumé not only including time as general counsel of the Federal Reserve Board and later the Federal Deposit Insurance Corporation, overseeing the legal division, responsible for legal work on regulatory issues, but also assistant general counsel for the US Treasury Department, and as senior partner for prominent law firm, Jones Day.
Explaining the reasoning behind his Plan, the now 78-year-old Bradfield says: “We had terrible things happen in the international financial system; people suffered very substantial financial losses, high levels of unemployment, riots in countries like Greece... What is something we can do about it?
“So I said, let’s try to narrow the scope of application and still have an enforcement mechanism and a system that protected the intervention of the international financial environment, but left a big chuck of responsibility to domestic regulators. That’s the motivating force and rationale.”
Whilst Bradfield’s Plan – which he modestly intends to rename – is still in need of further fleshing out, he believes he’s found a lot of like-minded people in his fellow faculty members and Fellows in Salzburg.
“I think there was a lot of interest,” he beams. “All that I could expect was that there’s interest and that it’s worth exploring, and I heard that from a number of people...
“There’s a lot of details that need be explored and accounted for and modifications made to deal with problems. That’s as far as we can go at the present moment. And we’ll meet again next May to sign the agreement!” he adds optimistically.
Perhaps the plan or agreement can be re-named the ‘Salzburg Plan’?
“A very good suggestion!” exclaims Bradfield with a nod and a smile.
Related to Salzburg Global Seminar Session:Financial Regulation: Bridging Global Differences - August 2012
posted on: 28 August, 2012
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