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Commentary: The European Version of Obama's Financial Regulation Proposal
Traders Magazine Online News, June 29, 2009
Part V of President Barack Obama's proposal for financial services regulation reform acknowledges the fact of our global economy: "Without consistent supervision and regulation, financial institutions will tend to move their activities to jurisdictions with looser standards, creating a race to the bottom and intensifying systemic risk for the entire financial global system."
The President's proposal suggests that the term "global" is meant to refer to the G-20 nations, since the proposal makes references to agreements reached at the G-20 summit in April. The group of G-20 nations, in addition to the European Union and the United States, also includes Argentina, Australia, Brazil, Canada, China, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey. Four members of the European Union--France, Germany, Italy and the United Kingdom--are also members.
The G-20 is not the United Nations, and one can easily speculate about why some nations are considered important to the global regulation of financial services, and therefore included as members, while others are left off the list. The European Union is the largest economy in the world, followed by the United States. The 19 nations represented--the European Union is not a nation-state--would be on the list of the 31 largest economies in the world. However, Spain, the Netherlands, Poland, Belgium, Sweden, Austria, Greece and Denmark, which are all members of the European Union, as well as Switzerland, Norway, Iran, Venezuela and Taiwan are not G-20 members, but have larger economies than some of the other members of the G-20. Moreover, the four G-20 members of the European Union have ceded much of their regulatory authority over economic matters, including financial regulations that are not purely local in nature, to the European Union, raising doubts about their importance in fashioning a global regulatory system.
It is safe to say that the G-20 has no plans to establish a global financial regulator. At most, there are proposals to establish a "College of Regulators" to facilitate communication among regulators from the G-20 nations.
With global financial regulation off the table, the second best solution is a regime of parallel regulation. In theory, if everyone adopts the same regulations, no financial institution would have an incentive to move activities into a less regulated environment. So the phrase "consistent supervision and regulation" appears to mean that everyone in the G-20 will impose equivalent regulatory regimes.
Parallel regulation is, however, much more complicated than it sounds. Different cultures have different assumptions about the purposes of regulation that are reflected in their legal regimes and even their languages. As a result, they start at different places and travel on separate paths. This makes it difficult to end up at the same place.
Not much has been heard from China and the other Asian nations in the G-20 about globally consistent regulation. On the other hand, the European Union has been especially enthusiastic about creating a regulatory regime intended to line up with President Obama's proposal. The European experience illustrates the difficulties of the process.
As discussed in last week's column, the cornerstone of President Obama's proposal is to transform the Federal Reserve System into a systemic regulator. All systemically important financial institutions, including the largest banks, broker-dealers, insurance companies and hedge funds, would be designated Tier 1 Financial Holding Companies, subject to regulation by the Fed. A college of U.S. regulators, called the Financial Services Oversight Council, comprised of the heads of the Federal Reserve System, CFTC, a newly created Consumer Financial Protection Agency, FDIC, FHFA, a newly created National Bank Supervisor, and the SEC, as well as the Secretary of the Treasury, will advise the Fed. But, it will largely be up to the Fed, following standards mandated by Congress, to determine which institutions are Tier 1 FHCs and how these institutions will be capitalized and managed.
