When Mark Carney replaces Mervyn King as governor of the Bank of England in July, the world will be deprived of King's witty public utterances. My favourite came when, commenting on strong retail-sales figures during one Christmas period, he cast doubt on their significance for assessing the state of the economy. "The true meaning of the story of Christmas" he solemnly intoned, "will not be revealed until Easter, or possibly much later".
King's most quoted phrase is that "global banking institutions are global in life, but national in death". They trade globally, across porous borders, attaching little significance to the geographical location of capital and liquidity. But, when the music stops, it is the home regulator, and the home central bank, that picks up the tab, even if the losses were incurred elsewhere. A failing bank may also leave behind a mess in third countries, which its home authorities may not clean up.
Icelandic banks, for example, took deposits in Britain and the Netherlands, and swept them back to Reykjavik, leaving the host countries out of pocket.
Regulators have wrestled with this problem for years, without conspicuous success.
In mid-December, the Bank of England and the United States Federal Deposit Insurance Corporation announced what seemed like a breakthrough, at least concerning the major banks headquartered in the US or the UK - that is, 12 of the 28 institutions regarded by the Financial Stability Board as globally systemic. In their case, a resolution authority, in London or Washington, would take control of the parent company, remove senior managers, and apportion losses to shareholders and unsecured creditors.
It sounded plausible. But the Anglo-American love-in quickly soured. Indeed, while the Bank of England and the Federal Deposit Insurance Corporation were working on their plan, the US Federal Reserve was developing proposals that would expose overseas banks in the US to far tighter controls and supervision.
The Fed is seeking to oblige foreign banks to create a holding company to own their separately capitalised subsidiaries, in effect giving the Fed direct oversight of their business. They must also maintain stronger capital and liquidity positions in the US.
The justification offered for these new impositions is that overseas banks have moved beyond their traditional lending business to engage in substantial and often complex capital-market activities.
The UK's Financial Services Authority has invoked the same rationale for requiring foreign banks to establish local subsidiaries, rather than taking deposits or lending through a branch of the parent bank.
On the face of it, these moves appear to be justified, But we should be clear that these changes amount to a reversal of decades of policy by US and British regulators. Ernest Patrikis, a former Fed supervisor, points to the clear implication that in the US, domestic banks will have a strong advantage over foreign banks.
Larry Fink, the chief executive of the multinational investment-management firm BlackRock, takes a similar view: "It really throws into question [the] whole globalisation of these firms", with "each country for [itself]". He adds: "I wouldn't call it a trade war, but I would certainly call it a high level of protectionism."
There is a risk that these interventions are the thin end of a dangerous wedge. Forced "subsidiarisation" causes capital and liquidity to be trapped in local legal entities, reducing the effectiveness with which that capital is used.
Moreover, tools that may be used wisely and well by institutions with a global outlook, like the Fed and the Bank of England, could take on a different character in countries where a commitment to free and open markets cannot be taken for granted.
So we must hope that the US and British authorities move carefully and do not use their new powers to freeze out foreign competition.
Howard Davies, former chairman of Britain's Financial Services Authority, and deputy governor of the Bank of England, is a professor at Sciences Po in Paris. Copyright: Project Syndicate