Banking Regulation and World Trade Law: GATS, EU and and Prudential and Institution Building by Lazaros E. Panourgias

Introduction
LET IT BE important what welfare means, who decides for it and how
it should be best pursued. Developments in the area of financial serv-

ices give us an opportunity to test institutional arrangements against
this objective and decipher the role of the law. Increasing share in economic
growth, deregulation in the form of less regulation, more tolerance of the blur-

ring of financial activities (banking, securities, insurance) and constant inno-

vation characterize the financial services industry. These are important issues
for the nations’ internal web of welfare crystallization. Liberalization of inter-

national trade comes to add an extra layer in the welfare determination
process. It does so by treating certain compromises on national regulatory
autonomy as welfare enhancing, delegating relevant power to international
norm-making and defining mechanisms for further welfare delineation.
This extra institutional layer of welfare determination as it applies to the
regulation of banking is of concern for the analysis here. Banking is under-

stood as commercial banking, mainly, the activity of institutions under
which they take repayable funds, eg deposits, from the public and grant
loans for their own account. This book examines the institutions for weigh-

ing trade and banking regulation objectives. The following questions will
be addressed: How has international norm-making dealt with trade liber-

alization? What is the effect on banking regulation? What are the tools for
resolving conflicts between international trade and banking regulation?
How is jurisdiction over such conflicts allocated at both a vertical and hor-

izontal level? What is left for the national regulator and what is determined
at the international level? Is the legislative or the adjudicative process in
charge? How is efficiency and legitimacy of this conflict resolution process
best ensured? What does ‘international banking regulation’ have to say?
The starting point of this book is the General Agreement on Trade in
Services (GATS) and its Annex on Financial Services. As part of the World
Trade Organization (WTO) framework, the GATS establishes multilateral

arrangements for liberalization of trade in financial services. It applies prin-

ciples of free and fair trade to domestic financial regulation. WTO Member
countries have agreed to certain market opening commitments (market
access) and are expected to treat financial institutions and financial services
of any other Member not less favourably than like financial institutions
and financial services of any other country (most-favoured-nation princi-

ple) or of their jurisdiction (national treatment principle). Although mar-

ket access and national treatment apply only to measures so agreed,
considerable domestic regulation has been committed and further commit-

ments are envisaged through a ‘built-in’ structure toward more liberaliza-

tion. In addition, non-discriminatory domestic regulation may be subject
to trade disciplines. 
The effect of these legally binding, international trade norms on banking
regulation has two facets. Firstly, they impinge upon domestic banking reg-

ulation and its objectives. Of primary concern are the protection of depos-

itors and the stability of the banking system, which, as shown below, are
the main considerations in the public regulation of banking. To the extent
that domestic banking regulation is found inconsistent with free trade, a
compromise on these objectives is imminent. Secondly, they allow interna-

tional activity of banks to intensify and therefore add a new issue for bank-

ing regulation, domestic and international. Banks operating in multiple
national legal orders can bring macroeconomic benefits to the host juris-

dictions. However, they also constitute additional sources of financial sta-

bility risk by linking national banking systems and making them vulnerable
to deficiencies of one another’s regulatory regime. In addition, they can
prove complex for a decentralized system of regulation. 
The GATS addresses the interplay of trade and banking regulation
through its so-called prudential carve-out. It says that domestic measures
for prudential concerns, that is mainly concerns about depositor protection
and systemic stability, can be exempted as long as they do not constitute
means for avoiding the GATS commitments or obligations. This is both
over- and under-inclusive. It is over-inclusive because the lax means-ends
balancing test and the indeterminacy of the ‘prudential’ concept allow
almost all banking regulation to sustain easily the GATS review. It can
prove to be under-inclusive because of the ambiguity of the ‘prudential’

Banking Regulation and World Trade Law: GATS, EU and and quot;Prudential and quot; Institution Building by Lazaros E. Panourgias