Rhineland Funding Capital Corp.’s legal home is in the tax haven of Jersey. The US is the source of Rhineland’s funding and the destination of its investments. But it was the German financial regulator, BaFin, which took responsibility when some of those investments got into trouble. It arranged for a group of German banks to rescue Rhineland’s parent, IKB Deutsche Industriebank.
The IKB story and the subsequent tremors in markets worldwide are an excellent example of both the weakness and strength of contemporary borderless global finance.
The main weakness is that distance allows costly ignorance to flourish. The Internet may have shrunk the world, but IKB’s managers and board didn’t seem to have understood fully the risks involved in Rhineland’s heavy indirect dependence on US subprime mortgages.
Equally, Rhineland investors such as Robbinsdale Area Schools in Minnesota were probably almost as ignorant of German banking regulation in 2006 as they would have been in the pre-Internet era.
But IKB’s problems haven’t caused a bank crisis, in large part because they were countered by one of the strengths of international finance: a global sense of responsibility.
Deutsche Bank, which blew the whistle on IKB, has an international reputation to protect. It wouldn’t want to have even indirect responsibility for damaging educational finances in the Minneapolis area.
Similarly, the European Central Bank bears no responsibility for writing bad mortgages in the US Midwest. But it didn’t try to make the Americans sort out their own problems.
Instead, it sent €156 billion (Rs8.68 trillion) of liquidity into the eurozone market over two days. That was remarkably unselfish. Much of the money is thought to have been used in the US, but if the liquidity has any inflationary effect, it will be in the eurozone.
Such global thinking from authorities with solely domestic remits is enough to make any internationalist proud. But it may be too soon to celebrate.
As yet, no local regulator has had to deal with the failure of a huge and fully international institution. Divvying up big multinational losses would be a more significant test of international institutional solidarity.