Report by Public Citizen's Global Trade Watch Division: No Meaningful Safeguards for Prudential Measures in WTO Financial Service Deregulation Agreements
Public Citizen released a new report for the September 2009 G20 summit, titled "No Meaningful Safeguards for Prudential Measures in World Trade Organization's Financial Service Deregulation Agreements." This report's first section examines the existing financial services deregulation requirements of the World Trade Organization (WTO), and the proposed expansion of these through the "Doha Round" of trade talks. Just some of the WTO limitations many governments have placed on their financial regulatory policies are:
- A "standstill" on financial regulation of sectors already committed to WTO jurisdiction, so countries risk WTO challenges if they reregulate elements of the financial industry.
- A ban on policies that limit the size of financial institutions (aimed at dealing with the too big to fail problem), regardless of whether such rules apply equally to domestic and foreign forms.
- Foreign firms must be allowed to offer any new financial product or services – no matter how risky – limiting the ability of countries to keep out harmful products, such as the credit default swaps and collateralized debt obligations that fueled the current financial crisis.
- Government aid to the financial industry cannot favor domestic over foreign companies – even inadvertently.
When the WTO's financial services provisions were negotiated and implemented in the 1990s, there was a prevailing consensus that the shift towards expansive deregulation would be permanent. This consensus has been all but swept away after the 2007-09 financial meltdown, but the binding WTO obligations remain. Many members of Congress and legislators in other nations now grappling with how to best reregulate the financial sector remain largely unaware that these WTO rules require countries to maintain the very financial sector policies that led to the crisis and could pose impediments to effective reregulation.
As this significant problem has begun to bubble to the surface – in the Stiglitz Commission report, in a G-24 paper, and in various analysis from consumer and development organizations – WTO defenders have tried to shut down the needed review and renegotiation of these WTO provisions. First, they claimed that the WTO does not require deregulation, only "liberalization." Then, faced with the plain deregulatory language of the actual WTO provisions, they switched their defensive argument to focus on a provision on "domestic regulation" of financial services, sometimes (disingenuously) called the "prudential exception" or "prudential carve-out." However, as this paper shows, this provision offers no safe harbor for financial safety measures – in that it contains a self-cancelling loophole clause. Unfortunately, similar restrictions on countries' financial service prudential regulation were placed by the Bush administration in nine current and three pending trade and investment agreements – most of which additionally provide private foreign investors with standing to challenge governments' financial stability measures before foreign tribunals to claim cash compensation.
We conclude with some suggested changes to the current WTO provisions, so that financial stability proposals could be truly protected from challenge under trade and investment pacts.
Read the full report here (PDF).