EU pushes US on bank reform

As discussed previously on this blog, the only financial reform that involves a race to the top is requiring financial institutions to disclose their current asset and liability level data.

All other financial reforms like capital requirements are subject to a race to the bottom.  This is because financial regulators are responsive to the argument by banks that they need a level playing field to compete and the nation with the easiest regulation sets the global standard.

The Financial Times ran an article showing how the race to the bottom in regulation plays out.

The European Union’s top financial regulator has warned the Obama administration that it must speed up and toughen its new banking rules in order to prevent American banks from having unfair advantages over their European counterparts. 

In a letter sent last week to US Treasury secretary Tim Geithner, Michel Barnier, the European commissioner in charge of financial markets, argued that Brussels was ahead of the US in several areas – including capital requirements for banks and limits on bonuses for financial executives. Mr Barnier urged the US to match European efforts. 

“The level playing field must be a reality, not an empty slogan,” he wrote in the May 27 letter, which was obtained by the Financial Times. The letter, written ahead of Mr Barnier’s visit to Washington on Wednesday, comes amid heightened transatlantic friction over the course of regulation in the wake of the collapse of Lehman Brothers.... 

However, Mr Barnier is himself facing suggestions that the EU has watered down key aspects of its latest drive to beef up capital requirements for its banks according to the terms of the Basel III agreement. US officials argue European regulators give their banks too much latitude on capital definitions. 

In his letter, Mr Barnier underlined European concerns about the US commitment to Basel standards. The US has yet fully to implement Basel II. “As you may recall, we implemented Basel II already in 2006,” Mr Barnier wrote. “It is essential to respect the deadlines agreed last year.” 

Potentially more explosive is Mr Barnier’s push to get the US to put more limits on bonuses for US bankers, which the EU believes is essential to limiting incentives for US-based executives to take excessive risks. 

The major industrialised nations agreed to curtail incentives for such risk-taking at the G-20 meeting in Pittsburgh two years ago, but the US has mostly used non-binding guidelines to implement the deal and does not enforce specific cash-limits on bonuses. 

Mr Barnier wrote he believes the US approach “leaves too much latitude for financial institutions” and allows them to “circumvent globally-agreed principles”. 

“I think you agree with me that ‘bankers’ bonuses’ is a matter that continues to cause public outrage,” Mr Barnier wrote. “Getting this matter right is key to restoring our citizens’ confidence in the financial system – and ultimately – their confidence in the public authorities regulating the financial institutions.”