Barney Frank Endorses Regulatory Protectionism

When a government increases the burden of taxes, spending, and/or regulation, this makes it more likely that productive resources - on the margin - will gravitate to jurisdictions with better economic policy. Crafty politicians understand that the freedom to cross borders is a threat to statist policies, which is why international bureaucracies dominated by high-tax nations, such as the Organization for Economic Cooperation and Development, are trying to undermine tax competition between nations by imposing fiscal protectionism. The same is true for regulation. The Chairman of a key House committee wants to impose regulatory protectionism to restrict the ability of Americans to patronize banks and other financial services companies based in jurisdictions with more laissez-faire policies. The Financial Times has the unsavory details:

Barney Frank, chairman of the House financial services committee, said he was concerned the new US push to regulate banks and brokers more rigorously could put it at a competitive disadvantage if other countries did not follow suit. As a result, he would like to ban US banks from doing business with countries not subject to similarly tough standards on everything from leverage limits and capital requirements to rules on transparency and clearing of derivatives. “Once we have rules  . . . we will say to anybody who wants to be an outlier, ‘you forfeit your right to participate in the American system’,” Mr Frank told the Financial Times. “We will instruct the [Securities and Exchange Commission] and Treasury and the Fed to deny access to the American financial system to any country that holds itself out as a haven to escape our financial regulation.” ...While Mr Frank is a powerful committee chairman, he would have to win over the rest of Congress and the administration to get his idea made into law. He is also certain to face strong opposition both inside and outside the US. “It is absolutely the wrong approach,” said a top industry lawyer, who did not want to be identified criticising Mr Frank. “The assumption is that everybody has to do business in the US and we can set global standards. That is absolute nonsense. There are alternatives, including Hong Kong,” the lawyer added. ...Tim Ryan, president of the Securities Industry and Financial Markets Association, said that US regulations should not be imposed on other countries. ...The European Commission has an exclusion provision in its proposed directive on alternative investment managers. Outside managers and funds would be excluded if their home states did not offer comparable levels of regulation and tax co-operation. That proposal is seen as a protectionist effort to box out US groups and may be revised. Mr Frank’s interest in banning groups from non-co-operating countries stems in part from the US experience after it adopted the Sarbanes-Oxley corporate accountability law. Many overseas companies opted to list outside the US rather than comply with Sarbox requirements.