Q: Would financial reforms that seek to de-link services and overturn Volcker’s rule present an opportunity for banks in emerging countries who still follow these principles to overtake their more established northern counterparts?
Vernengo: The preliminary question to be asked would be why banks in the developed world have an edge in the first place. Credit creation and international trade in different periods have been for the most part denominated in a single national currency that functions as world money. The pound had that role during the Gold Standard and the dollar since World War II. The advantage of financial institutions in the hegemonic country derives from the fact that they lend in the world currency, and have access to a risk free asset (domestic government bonds) and a lender of last resort that can act on a global basis.
This is not the case in a developing or peripheral (emerging market was the term used by the neoliberals to sell the reforms in the developing world) country. For example, the Fed recently pumped billions of dollars into the system, but in 2001 the Argentinean central bank was unable to do the same.
The Volcker rule would fundamentally reduce the size of banks in the US to restrict the perils associated with the “too big to fail” doctrine. Wall Street banks oppose that rule fiercely, but it is not clear that breaking up banks would be sufficient to preclude the sort of activities that led to the crisis, as noted recently by Paul Krugman.
The risks associated with the functioning of a shadow banking system, unregulated by the government, will not be checked by Volcker’s rule. Also, and more important for the question, Volcker’s rule will not directly affect the position of financial institutions in the center vis-à-vis their counterparts in the periphery. The advantages associated with borrowing and lending in the hegemonic currency remains. If a Brazilian firm wants to borrow in international markets (in dollars), the corporate bonds will still be sold by a Wall Street firm.
In that sense, what would be more threatening for the American institutions would be the demise of the dollar as the key reserve currency in the world economy. Note, however, that even after the fall of the pound, and the unraveling of the British centered financial order, the City of London and its banks remained important players in global markets.