Cross-border financing is more complex than ever. And
Nicolas Véron, a senior fellow at Brussels-based think
tank Bruegel and visiting fellow at the Peterson Institute for
International Economics in Washington DC is as well placed to
unpick it as anyone. His research is mostly about financial
systems and financial reform around the world, including global
financial regulatory initiatives and current developments in
the EU. Here he touches on the key trends in global
cross-border finance, his views on transatlantic capital flows,
how best to regulate such flows and the challenges of a Chinese
economy gradually integrating itself into the global
What are the key trends, globally, in cross-border
It depends where you look. In the eurozone, there has been
significant financial fragmentation in the five years up until
2012-2013, and then a trend reversal. From a global
perspective, however, and especially in emerging markets,
cross-border financial integration has continued more or less
on the pre-crisis trend. So Europe is an outlier, rather than
indicative of a change in the global trend towards cross-border
"The very notion of a globally integrated derivatives
market is challenged"
Europe has a very heavily bank-based financial system and
certainly since the start of the crisis in 2007, banks have had
to rely on implicit guarantees from governments. Whenever EU
governments have triggered such guarantees, they have also
asked that the bank in question focus its lending back to the
country in which it's based. There's a famous quote –
often attributed to Mervyn King but in fact from Thomas Huertas
– that "banks are international in life, but national
in death." That captures the European experience since 2007
quite well. What is happening now in Italy is a good
illustration – triggered as it is by supervisory
actions of the ECB under the new banking union regime, but
still framed as a national banking sector problem. The eurozone
is now a hybrid system: neither purely national nor truly
There are other factors as well. The wide-ranging reforms of
over-the-counter derivatives markets, initiated by the G20 in
2009 and gradually implemented since, change significantly
where some trades are booked, which has a large impact,
especially on transatlantic capital flow numbers even if the
real economic impact isn't that huge.
If we accept that capital flows are pro-cyclical, where are
we in the cycle?
There is generally no such thing as a global cycle. To be
sure, there was a coordinated moment of difficulty in 2008, but
then the US resolved its financial sector problems much more
quickly than Europe, and so did the UK compared to the
eurozone. And that's leaving aside Asian and other emerging
economies, where there was actually no financial instability in
2007-09 even though they were hit by the economic and trade
So the big picture remains a long-term structural trend of
global cross-border financial integration, and around that
trend there are different financial cycles in different parts
of the world, rather than one grand coordinated cycle
How do you view the state of affairs regarding
transatlantic cross-border finance?
Now we've had the Brexit vote everything is up in the air.
As regards the large derivatives market already mentioned, it
is important to remember that the pace of implementation of the
G20 reforms, including mandatory central clearing for many
derivatives, has been highly differentiated. These reforms are
fully in place only in the US.
There are also a lot of unintended consequences. Two broad
and perhaps interrelated issues come to mind. The first is the
concentration of risk in clearinghouses, which are becoming
systemically critical to financial institutions. The
implications of this in terms of the regulation, supervision
and potential resolution of clearinghouses hadn't been thought
through when the G20 decisions were made, to put it mildly.
Second, and even less thought through, is that there is no such
thing as global supervision, and since clearinghouses require
supervision and crisis management, and perhaps also some forms
of public guarantees, the very notion of a globally integrated
derivatives market is challenged. Supervision has to be
conducted on a jurisdiction-by-jurisdiction basis, and actually
country-by-country because the EU doesn't count as a single
jurisdiction in this area. So there's a fundamental tension
between the central clearing mandate on the one hand, and the
global integration of OTC derivative markets as they existed
before the reforms on the other hand.
We're only at an early stage of the learning curve as to how
to address these challenges. It is also fair to say that having
made such big decisions first, and then thinking about the
consequences years later, is no great example of quality public
policymaking. Personally, I remain somewhat agnostic on whether
these G20 reforms were a good thing overall for financial
stability. One problem is that many of the people who made
these decisions are still those in charge. It's very hard for
them to acknowledge that they had not properly considered the
consequences when they made their decisions. That doesn't help
bring about the debate that is needed.
And from a US perspective, how does that debate resolve
itself on transatlantic issues?
The shenanigans between the EU and US on things like
equivalent status for clearinghouses are in fact relatively
marginal, compared to the challenges of finding a workable
policy framework at the global level for these kinds of
reforms. The policy debate on things like how to oversee
clearinghouses lags behind the implementation of the reforms,
which itself is way behind schedule. The risk of unintended
consequences is very high, and some have crystalised
How easy do you think it will be for capital from the
Americas to access whatever it is that Capital Markets Union
(CMU) eventually becomes?
Until now, the CMU has been a very compelling rhetorical
vision proposed by the European Commission, and largely
inspired by the UK. But it has had little to show in terms of
actual policy decisions, and that's also largely (though not
only) because of the UK. This is because a credible CMU
requires European enforcement of capital markets rules, and the
UK didn't want to even consider such options as they would have
been viewed as a Brussels power grab in the referendum
campaign. So the question to ask now from an Americas
perspective is whether the decision of the UK to leave the EU
will kill CMU and destroy the rhetorical vision, or instead
unlock CMU and make it more real, at least in the EU27 (current
EU minus the UK). We probably won't know for some time.
And it was political too? An offer to the UK, in order to
make staying in the EU more attractive.
Yes, to begin with. Initially, European Commission President
Jean-Claude Juncker saw the CMU as an unambiguously positive
project for the EU's relationship with the UK. But then
everyone realised that things weren't that simple. Commissioner
Hill ended up advocating an ambitious CMU vision, but at the
same time being structurally prevented from implementing it,
largely because of the UK veto against any institutional
centralisation in this area.
I am still hopeful that the EU27 will move towards better
integrated and more developed capital markets. There's really
no early indication that the EU will adopt a more closed,
protectionist or corporatist model as a result of the UK choice
to leave the EU. These are obviously extremely early days so
this point has to be made with caution. But it would be
misleading to see the UK as the only driver of liberalisation
or reform in the EU.
Most cross-border capital flows are channeled through
global banks. Do you see any competitive advantages for banks
in the Americas, particularly the US, over European banks
– or vice versa?
It's only natural that most market participants equate more
regulation with being bad for business, but this is just not
the full story. There's good regulation, and bad regulation.
Smart regulation, and dumb regulation. If you only deregulate,
if public oversight of markets becomes ineffective or
powerless, there's ultimately a bad outcome for markets.
Markets need strong policy frameworks. They don't exist in a
vacuum: to put it bluntly, capital markets don't work very well
in Afghanistan. So a structured and effective framework of
public policy and governance is needed for markets to thrive.
One would have hoped that after 2008, the naïve and
misleading view that less regulation is always better for
business would have lost traction. But many people have short
So, as an economist, if you close your eyes can you see the
theoretical sweet spot for regulating cross border
It's a constantly changing sweet spot, because there's
always so much change in the in the financial world. Regulation
has to change accordingly, and there's never really a perfect
answer, let alone a steady state. It's not the same, over time,
for the same place, let alone different places. Regulation
really has to constantly adapt to its environment.
How will Brexit impact cross-border finance into or from
At this point, there's simply a lot of uncertainty about
everything. When we know more about the future trajectory for
the UK then it might be clearer as to whether London is to
remain in the single market or not.
"If the UK does leave the single market, then the City
will probably hollow out"
That's what really makes a difference for financial
services. For now we just don't know. If London stays in the
single market, Brexit doesn't change much after all: it's a bit
more complicated than that, but that's a good first-order
approximation. But if the UK does leave the single market, then
the City will probably hollow out. It might be gradual or it
might be sudden, but in all likelihood, leaving the single
market will be extremely bad news for the City of London.
It would mean a lot of business would be up for grabs from
other jurisdictions – some would go to New York but a
lot would probably remain in the same time zone, which may mean
several different places inside the EU.
For US financial firms, then, there is a plus and a minus.
The plus is that New York may gain some of the global business
that's currently being done in London. The less good news is
that there are transition costs to relocating from London to
the EU. In the end, US financial firms can adapt. For them,
London has been a great place to do business in the past 20
years, but there's nothing that forces them to stay there if
London loses its comparative advantage. And outside of the EU
single market, London will certainly lose a lot of its
After 2008, do you think globally unfettered capital
markets can be justified – in theory or
Capital markets are not in fact unfettered. There are
obvious regulatory challenges, including the obvious fact that
we don't have effective structures in place at the global level
with which to deal with global markets and firms.
Thus it is difficult to have deeply integrated cross-border
systems that are also properly regulated. But even so, there
has been incremental progress. For example, the Financial
Stability Board (FSB) has made a positive difference. The Basel
Committee now monitors how its standards are implemented, that
a meaningful step in the right direction.
Currently, we have a hybrid model where most global
regulation is applied inside jurisdictions. This creates
mismatches with the notion of global cross border financial
integration. If one looks only at the European aspect, Brexit
is a big loss but Banking Union is a huge gain. So it's not all
An even bigger challenge is China. For China, gradually
integrating itself in a functioning global system may be even
more complex than anything that's happening in Europe. Of
course, China already has membership of bodies like the FSB and
the Basel Committee, but it remains largely a financial island,
not just for historical reasons but also for structural
reasons. China is becoming a massive presence in global
finance, and that creates increasingly real challenges in terms
of global financial stability.
Another big theme is that, before the crisis, the EU was a
big champion of global financial standards. Now, Europe still
talks the talk but no longer walks the walk. The European
Commission says it's in favour of global standards, but the EU
has the worst compliance record with Basel III in the world.
That's a bigger change than we've seen in the US, which always
had a stronger stance on the sovereignty of Congress. If
anything in the US, we've seen a move towards greater
international commitments, especially in terms of implementing
There are also fundamental questions about the analytical
lessons of the crisis for cross-border financial integration.
There is surprisingly little good literature on the trade-offs
of cross-border financial integration for advanced economies,
as opposed to developing countries. The reason is the
conventional wisdom which implies that for developed economies
cross-border finance is always good. After the last decade,
there are second thoughts. The complex relationships between
financial openness, financial development and financial
stability require a lot more research than there has been so
far, including better financial statistics to start with. There
is progress, but it is slow.
It's actually easy to underestimate the benefits of
cross-border financial integration, including in terms of
financial stability. For example, everyone knows about German
banks being hit by US subprime losses in 2007 and that's
clearly an instance in which cross-border finance propagates
financial instability. But think of what happened in Eastern
Europe, and in the Baltics in particular, where the financial
system being foreign-owned was actually a big stabilising
factor in a domestic boom and bust cycle.
Senior fellow, Bruegel
T+32 473 815 372
T: +1 202 550 0614
Nicolas Véron is a senior fellow at Bruegel,
and a visiting fellow at the Peterson Institute for
International Economics in Washington DC. He was a
cofounder of Bruegel starting in 2002, joined the
Peterson Institute in 2009 and divides his time between
the US and Europe.
Véron has authored or co-authored numerous
policy papers that include banking supervision and
crisis management, financial reporting, the eurozone
policy framework, and economic nationalism. He has
testified repeatedly in front of committees of the
European Parliament and US Congress.
His experience includes working for Saint-Gobain in
Berlin and Rothschilds in Paris in the early 1990s, as
an economic aide to the prefect in Lille, a corporate
adviser to France's labour minister (1997-2000); and
chief financial officer of MultiMania/Lycos France, a
publicly-listed online media company (2000-2002). From
2002 to 2009 he also operated an independent
Paris-based financial consultancy.
In September 2012, Bloomberg Markets included
Véron in its second annual 50 Most Influential
list with reference to his early advocacy of European