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The Global Financial Crisis And Government Support For Banks : What Role For The GATS?

This paper examines whether the GATS is a useful instrument to tackle government support that creates distortions of international competition in the banking sector. The GATS has no specific provisions on subsidies. However, general support schemes ‘as such’ or ‘as applied’ may violate Article XVII if they exclude foreign- owned banks with a commercial presence in the territory of the WTO Member that adopts the scheme. This depends on the specific commitments of the WTO Member and the limitations to this commitment. Moreover, it is required that the excluded banks are ‘like’ the domestic banks. A single application of a general scheme may violate Article VI:1 if solid evidence is available that this application is not reasonable, objective or impartial. Despite these possible violations, the great majority of measures will still be justified under the broad ‘prudential carve-out’. Only support measures that are not reasonably able to achieve the prudential goal will not be exempted. Hence, the GATS imposes only in very limited cases restraint on government support. The WTO Members should address the remaining uncertainties with regard to both the obligations and the exception. This would ensure that the GATS is able to prevent that government support distorts competition and would also alleviate concerns that the GATS constitutes a danger to financial stability.

Private Firms Working in the Public Interest-Is the Financial Statement Audit Broken? Abigail Bugbee Brown

2007 - "The Big Four accounting firms have become the object of much scrutiny following the string of financial statement fraud scandals at the beginning of this century. The apparent involvement of the large auditing firms in the accounting misdeeds comes as a surprise, since the academic literature on auditor incentives predicts that large, reputable firms will not engage in collusion with their clients. The lace of a consensus economic framework to understand the incentives facing the audit firms that reflects the historical reality has hindered consensus building in the policy response to the scandals. This dissertation develops a principal-auditor-agent model that suggests there may well be socially sub-optimal levels of audit intensity, even among the best audit firms. It explores archival historical evidence to identify examples of how these incentives have shaped the profession and develops a more nuanced reading of the root causes of the recent scandals. This work also identifies the gaps in our understanding of the cost and occurrence of fraud that hinders a proper cost-benefit analysis of policy options designed to improve the quality of information available to the market."

“That’s All They’ve Got?” (PCGTW 2010) "What Latest WTO Secretariat Paper on Financial Crisis Does and Does Not Say About GATS Disciplines on Financial Regulation"

March 15, 2010 by Todd Tucker and Public Citizen Global Trade Watch: "On February 3, the WTO issued a document that many in Geneva call the “non-response” to over a year of growing questions from WTO member countries and others about the connection between the rules of the General Agreement on Trade in Services (GATS) on financial services and the global economic crisis. 1 Indeed, this was the Secretariat’s first major study 2 in nearly 12 years about the WTO’s financial service rules. 3 The new paper is a disappointment to anyone hoping for a convincing rebuttal to charges that the WTO’s General Agreement on Trade in Services (GATS) promotes financial services deregulation...

Can’t Pay Back, Won’t Pay Back: Iceland’s Loud No

Silla Sigurgeirsdóttir and Robert H Wade – Le Monde Diplomatique The people of Iceland have now twice voted not to repay international debts incurred by banks, and bankers, for which the whole island is being held responsible. With the present turmoil in European capitals, could this be the way forward for other economies? The small island of Iceland has lessons for the world. It held a referendum in April to decide, more or less, whether ordinary people should pay for the folly of the bankers (and by extension, could governments control the corporate sector if they depended on it for finance). Sixty per cent of the population rejected an agreement negotiated between Iceland, the Netherlands and the UK to pay back the British and Dutch governments for the money they spent to recompense savers with the failed bank Icesave. That was less resistance than the first referendum last spring, when 93% voted no.

LOOTING:The Economic Underworld of Bankruptcy for Profit.

NBER Working Paper No. R1869 During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent - and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust. In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds. Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.