The ups and downs of the €
After decades of hesitation and doubt, Europe’s single currency was launched in January 1999. Peter Sutherland, chairman of Goldman Sachs International and a former EU Commissioner said it was the EU’s most important political project in 40 years. But many, especially in the US and the UK, questioned whether the new single currency would survive. Their concerns were over the long-term sustainability of a “one size fits all” monetary policy for all eurozone members, and doubts over whether it would be possible to pursue a credible single monetary policy without a single fiscal policy.
With hindsight, those fears now look exaggerated. Against the backdrop of a solid global economy since the euro’s birth, the eurozone’s economy has begun to grow solidly. Comparing the US economy with the 13 EU countries in the single currency, the eurozone emerges as a giant with annual output of over $11,300bn, compared with a gross domestic product (GDP) of just over $13,000bn for the US.
The single currency − designed to be a Deutschemark-like “hard” currency − has also been a force for stability. In the second half of the 1990s, as prospective euro members’ interest rates converged downwards towards German levels, and then in 1997-98 as the Asian and Russian debt crises rumbled around the world, the economies and financial markets of the future euro club coped admirably. As the EU’s Monetary Affairs Commissioner Joaquín Almunia remarked not long ago: “European Monetary Union (EMU) provides stability and protection in a fast changing global economy …increased resilience to external shocks and removal of exchange rate risks have helped achieve…consistently low and stable inflation rates.”
But the eurozone may now be entering a more difficult period. The crisis in the US sub-prime mortgage sector appears to be signalling a wider US economic slowdown and when the US sneezes the rest of the world tends to catch cold. The liquidity crunch in the world's interbank markets, which has its routes in that sub-prime mortgage crisis and which began in August 2007, also carries wider economic risks.
Despite headline-grabbing attempts last December by the world’s major central banks − the European Central Bank (ECB), the Fed, the Bank of England, the Swiss National Bank and the Bank of Canada − to inject liquidity into the troubled interbank market, interbank lending rates remained only marginally below their seven-year highs. With the liquidity crisis showing few signs of petering out quickly, banks look set to remain wary of lending to each other. Against that backdrop, banks may eventually have to rein back their commercial lending. When credit is in short supply, economic growth eventually suffers.
Last November, the European Commission said that an unexpectedly sharp correction in house prices resulting from the credit squeeze could pose risks to European growth. The Commission expects growth to "hold up reasonably well", but it nevertheless expects eurozone economic growth to fall from 2.6% in 2007, to 2.2% in 2008 and then down to 2.1% in 2009. "Residential construction investment will have a significant correction and will contribute much less than in the previous period to our growth," remarked Commissioner Almunia. In Germany, the eurozone’s economic powerhouse, retail sales fell 3.3% between September and October last year, yet with eurozone inflation reaching 3% in November the ECB’s capacity to tackle those weaker conditions with interest rate cuts is limited.
Even without a cloudier economic outlook, Europe’s new currency and its wider financial markets still have a long way to go to achieve the levels of efficiency needed to service the giant EU economy. The ECB’s Jean-Claude Trichet noted in mid-2007 that there is much left to do before the EU’s banking and financial markets achieve the depth of integration and sophistication needed to contribute fully to stability and growth. The ECB reacted boldly late last summer by injecting huge amounts of liquidity into the interbank market as the credit squeeze began, but there is no clear structure for coping with economic or financial crises.
Unlike America, Europe doesn’t speak with one voice in inter-governmental financial institutions. Just who is responsible for managing the euro’s value internationally, should that be needed, is still unclear. Europe lacks the political underpinnings the US brings to its dollar policy, and this denies the EU a global influence commensurate with its economic weight.
The euro has nevertheless been a greater success then many predicted. Politically, the divisions in the EU over such issues as the constitutional treaty would probably have been greater had it not been for the euro. And the euro’s existence has reduced the risk of political problems becoming compounded by currency crises; it is thus a cohesive and disciplining force.
The Euro’s path towards a more global role
The euro, after the US dollar, is the currency in which foreign governments most want to invest their reserves, and companies to do international business in.
Foreign exchange reserves held by governments around the world to meet their international obligations intervene in exchange markets and cope with external payments crises have been multiplying fast in recent years, and now total around $5,000bn. Of that, $3,300bn can be identified by currency in IMF statistics, and since 1999 the share of €-denominated reserves has surged from less than 18% to almost 26%, with the US dollar dropping from 71% to less than 65%. By 2010, says Deutsche Bank Research, the euro’s share of international reserve assets could reach 30-40%.
The EU’s Financial Services Action Plan
When the European Commission proposed its Financial Services Action Plan (FSAP) in May 1999, the intention was to tackle the morass of national financial regulations and create a genuine single market in financial services. Endorsed by the European Council in Lisbon in March 2000, it was seen as essential to accelerating growth at a time when unflattering comparisons were being drawn between US dynamism and “old Europe”. The US then appeared to have moved to an altogether higher plane of growth, productivity and capacity for technological innovation.
To improve the EU’s economic performance, it was thought vital to mobilise savings and allocate them more efficiently. The FSAP would seek to remove entrenched protectionist barriers to the cross-border integration of wholesale financial services for large companies, and to the retail sale to ordinary consumers of financial products across borders.
Action would also be needed to make sure that Europe’s financial markets would have solid regulatory underpinning to reduce the risk of the euro’s international credibility being threatened by a major financial crisis.
By December 2003, in an unparalleled flurry of legislation, all but a handful of the 42 components of the FSAP had been approved − a process in sharp contrast to the decade or more of haggling over the EU’s Takeover Directive. Only a few items, notably a new capital adequacy regime for insurance companies, Solvency II, are today still going through the EU’s legislative processes.
Just as fundamental to the development of Europe’s financial markets is the Capital Requirements Directive (CRD), which establishes new methods for calculating banks’ regulatory capital adequacy needs. Although based on Basle II, the Bank for International Settlements’ global capital standard, it is being applied within the EU in different forms to all banks. In the US, only the largest banks may be required to implement Basle II, so now there are fears there that the EU could benefit from a competitive advantage through the CRD’s progressive implementation, which began in January 2007.
Other key elements of the FSAP include the Prospectus Directive to harmonise the prospectuses backing the sale of securities, the Market Abuse Directive countering insider trading and market manipulation, the Third Money Laundering Directive, and the Transparency Directive dealing with disclosure requirements for quoted companies. EU-listed companies are also now required to adopt International Financial Reporting Standards, creating a common accounting system across the EU.
Although the FSAP’s legislative phase has now been largely completed, there is still a long way to go before it’ll have its intended impact on EU financial markets. And thanks to the liquidity crisis still afflicting the interbank market, various aspects of the FSAP are coming in for scrutiny.
Lessons of the Credit Crunch
The heart of any national banking and financial system is a country’s central bank; in the EU’s eurozone area it is the Frankfurt-based ECB that is responsible for managing monetary policy for the euro, now the currency for 13 (soon, with Cyprus and Malta, to be 15) of the EU’s 27 member states .
The ECB’s primary objective is to maintain price stability, which it has defined as an inflation rate “close to but below 2%.” And the ECB has largely succeeded in maintaining the anti-inflation credibility of the Bundesbank, Germany’s central bank.
But the ECB − as with any national central bank − also has a responsibility to help ensure the stability of the eurozone's financial system. That may include influencing banking regulation policy or providing liquidity to the financial system. But the ECB's role regarding financial stability is less clear than in the case of a national central bank working with the national finance ministry. The eurozone has no finance ministry, only the unwieldy Ecofin Council of all EU countries’ finance ministers, and the informal Eurogroup of eurozone finance ministers. The ECB has nothing more than an advisory and coordinating role in the field of banking supervision, and is not a fully-fledged lender of last resort.
But the ECB can provide liquidity to the markets. It did so in 2001 following the 9/11 terrorist attacks and, more dramatically, in August 2007 when liquidity in the interbank market dried-up. Last summer, the on-going problem of defaults in the US sub-prime mortgage sector began to cast doubts over the financial health of those banks holding securities backed by such assets. As the banks became wary of lending to each other, the ECB responded by injecting a huge €95bn of liquidity into the market in early August to try and push interbank borrowing rates down and head-off a credit crunch.
The ECB's intervention was also by far the most active of any central bank. The New York Federal Reserve Bank, for instance, injected only $24bn at that time, and the Bank of England was soon being criticised for its unwillingness to extend the list of eligible collateral that could be used in return for borrowing central bank money. In December, the Bank of England back-tracked on that point after announcing plans to offer funds to the market against a much wider range of collateral, including mortgage-backed securities. In contrast, the ECB had from the start adopted a more liberal approach to collateral.
Few would doubt that the ECB passed the test of the crisis management aspect of the liquidity crunch with flying colours − a further indication, perhaps, of the growing maturity of the eurozone's institutions. But the crisis has nonetheless highlighted a wider range of financial stability issues for European policymakers. And perhaps inevitably − given the highly visible run on the deposit base of UK mortgage bank Northern Rock − many of those issues have reflected the questions surrounding banking regulation.
Because of banks’ growing reliance on secured funding via securitisations and off-balance sheet vehicles, it has become clear that lenders are vulnerable to sudden disruptions of structured credit markets. The need now being identified is for banks to further strengthen their liquidity risk stress tests to reflect a range of different scenarios − including the protracted closure of a broad range of securitisation markets.
Trichet also confirmed last November that the ECB, along with the European System of Central Banks Banking Supervision Committee, were working on this area. The Bank of England, with the UK’s Financial Services Authority, has also focused on liquidity management as a major priority and is pushing for extra liquidity measures in the Basle II capital adequacy rules.
Thought is also being given to whether existing EU rules inhibit effective regulatory responses. In the UK in particular, the role of the Markets Abuses Directive has come under scrutiny after the Bank of England’s Governor Mervyn King highlighted the provisions of the directive as a key reason for blocking discreet support for Northern Rock. The UK’s central bank argued that being forced to publicly announce the support operation virtually ensured a run on Northern Rock’s deposit base. The capacity to have acted with more discretion, it is argued, could have limited the scale of the required support operation and removed some of the danger of contagion spreading to the rest of the banking sector.
As central banks are the only lenders of last resort, the wisdom of separating banking regulatory function from the central bank − especially in the UK − is now being questioned, and a similar debate is underway in Germany, where the regulatory agency, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), is equally separate from the Bundesbank.
The role of the rating agencies is under scrutiny, too. The Committee of European Banking Supervisors and the Financial Stability Forum, are being prompted to consider whether rating agencies face a conflict of interest by advising institutions on packaging debts whilst also awarding them high quality ratings.
The apparent failure of rating agencies to alert investors to the growing credit difficulties in the US sub-prime mortgage market may be another issue. France’s President Nicolas Sarkozy and German Chancellor Angela Merkel are both reportedly keen on tougher regulations for rating agencies.
Most significant of all, perhaps, the credit crisis has re-emphasised the limitations on any single national authority from tackling increasingly international problems. Policymakers across Europe are therefore stepping-up the level of cross-border consultation. A key institution is the Financial Stability Forum, which is linked to the Bank for International Settlements and brings together finance ministries, central banks and regulators. In the private sector, a number of major players, including Deutsche Bank, have begun to call for a single pan-EU regulator.
Why Europe cherishes the City of London
How important to the EU economy are banking and finance in general, and the City of London in particular? According to a report on behalf of the City, Europe’s wholesale financial services businesses was worth €195bn in 2006, accounting for close to a third of total global wholesale financial services output of €643bn, or 1.4% of global economic output.
Between 2001 and 2006, the EU wholesale financial sector has been expanding at around 6% a year, roughly comparable to the rate of growth of the US sector and much quicker than the average 1.9% growth rate between 2001 and 2006 for the EU economy as a whole. Wholesale financial services are thus a substantial growth sector and now account for around 1.7% of the EU’s GDP.
The EU has also become a dominant force in the global bond market - in 2006 around 32% by value of outstanding global bonds were held in Europe. In the equity markets, however, the US remains the leader in terms of market capitalisation, trading levels and the size of its equity markets compared with GDP.
Just over half of the gross value added by the EU’s wholesale financial services industry is clustered in eight financial centres, with London, the Ile de France region around Paris and Frankfurt accounting for just over a third of the total. But in the EU, London accounts for 28% of gross value added by sector. And London’s European dominance of the major international financial markets − as demonstrated by the table below − is unquestioned. London is well on the way to matching New York as the world’s top international financial centre, thanks in large part to the influx of American investment banks.
Although the British currency is still the pound sterling, the City joined the euro, practically speaking, right at the currency's birth. In the final years just before the euro's launch, the Bank of England played a robust role in leading the City's technical preparations. That along with the City's other fabled advantages − the English language, being in the right time zone to do business in Asia and New York on the same trading day, and the City's pro-globalisation instincts − and it was perhaps inevitable after the euro’s birth that London would remain Europe’s main financial centre.
London also benefits more than other centres from the growth in financial services. It's estimated that there are nearly a quarter of a million wholesale financial services sector jobs in London, while in Ile de France there are 100,000 and in Frankfurt just 57,700. Frankfurt’s hopes just a few years ago of equalling or even supplanting London as Europe’s top financial centre now seem a distant dream.
The City is a major European asset, and policymakers are increasingly mindful of possible threats to its position. The spectacle of thousands of savers queuing last September to withdraw money from Northern Rock − the first run on a UK bank in over a century − can have done little for London's international image. That in turn raises concerns over issues that range from the appropriateness of separating the regulatory function from the lender of last resort and the adequacy of deposit protection, through to the possibility that some EU directives may hinder effective regulatory responses to a crisis.
Why the jury is still out on Mifid
EU policymakers need to balance protection for European consumers with an awareness that too restrictive rules can damage centres like London that are largely wholesale based. Last November’s implementation of the Markets in Financial Instruments Directive (Mifid), which is designed to protect small investors, is seen by many in the City as an example of this. In 2006, the UK's Financial Services Authority estimated that the cost to the City of implementing Mifid would be about £1bn, with ongoing costs of £100m a year.
Mifid has drawn comparisons with America's onerous Sarbanes-Oxley Act. Yet it is widely accepted that it was Sarbanes-Oxley that allowed London to grab a huge slice of business − especially Russian and Asian business − away from Wall Street.
Mifid could nevertheless be a catalyst for change by giving EU financial centres the regulatory foundations for a pan-European securities market. When Mifid was enacted, the European Commission said the new directive “would allow investment firms, banks and exchanges to provide their services across borders on the basis of their home country authorisation (and) benefit investors, issuers and market participants by allowing banks and other investment institutions to compete fairly with stock exchanges.”
It is true that eliminating stock exchanges’ monopoly status maybe no more than evolutionary. Already corporate bonds, financial derivatives and, through various alternative trading structures, shares, are exchanged “over-the-counter” in the UK and the US, rather than on the floor of an exchange. But Mifid provides a regulatory framework for this in countries like France and Italy, where national rules have long required trading to be carried out in a regulated market place.
Mifid has therefore helped pressure Europe’s bourses into cutting trading costs. That, alongside technological change and financial market globalisation, has been a factor driving pressures on bourses to merge. This is evidenced by the succession of (unsuccessful) bids for the London Stock Exchange, the LSE’s own bid for Italy’s stock exchange, and the successful merger of the multi-national European exchange Euronext and the New York Stock Exchange.
Why cross-border bank mergers are fairly rare
Six months after Europe’s finance ministers gathered in September 2004 at the Dutch resort of Scheveningen for an informal Ecofin Council meeting, Rijkman Groenink, the then chief executive of Holland's ABN-Amro bank launched a takeover bid for Italy’s Banco Antoveneta. Ironically, Mr Groenink had been one of three top bankers invited to Ecofin to brief ministers on barriers to cross-border EU banking consolidation.
A background paper for their discussion had underlined the way that the closer integration of Europe’s national banking sectors would boost competition and lower borrowing costs for companies and individuals. The threat of takeovers by large US banks was also a factor behind European banking consolidation. The paper highlighted obstacles to cross-border deals, including fragmented and incompatible regulatory structures and tax, legal and cultural differences.
But it wasn’t long before ABN-Amro itself ran headlong into another obstacle, rampant government-backed protectionism. It was only after a bitter struggle and a scandal surrounding the forced resignation of Antonio Fazio, Governor of the Bank of Italy, who was revealed to be conniving to block cross-border takeovers of Italian banks, that ABN-Amro was able to pull-off its deal.
Today, ABN-Amro has itself been taken over. After a protracted battle between the UK’s Barclays and a Royal Bank of Scotland-led consortium which included Belgo-Dutch Fortis and Spain’s Banco Santander, ABN-Amro fell to the consortium. The deal wasn’t so much a cross-border merger as cross-border dismemberment, favoured by shareholders for purely commercial reasons. Despite this − an approach accepted, but not favoured, by Dutch regulators − it was endorsed by the EU’s Internal Market Commissioner Charlie McCreevy.
Whether such a cross-border deal could happen now, in the midst of the credit crunch, is another matter. Indeed, It seems unlikely that the consortium would have been so determined to bid for ABN-Amro had the members known that they would be raising funds from shareholders to finance the deal in difficult market conditions. The liquidity crisis has had the effect of curtailing M&A activity dramatically and in all sectors - for both cross-border and ‘in-market’ deals.
There have always been considerable commercial obstacles to cross-border deals. The ECB has stressed that public policy can only play a limited role, namely in reducing obstacles to cross-border banking. A merger or takeover must ultimately generate value for shareholders. But synergy benefits − savings generated from consolidating overlapping operations − are a key commercial consideration, and are usually only sizeable when the parties concerned compete in the same markets. The scale of such “in-market” synergy benefits was dramatically demonstrated when Royal Bank of Scotland’s acquisition of NatWest in 2000 generated £1.44bn in cost savings. Cross-border deals, though, usually deliver only limited synergy benefits because of limited overlaps between banks in different countries.
This leaves cross-border banking deals as largely a means for securing access to new markets − such as Banco Santander's acquisition of UK mortgage bank Abbey National. Yet despite these natural commercial impediments, there is growth in cross-border banking within the EU. Between 2000-2004, cross-border deals accounted for 14% of total value of euro area banking M&As. Owing to larger rather than more numerous deals, this had risen to 38% by 2004-05. In 2005, the Euro System of Central Banks (ESCB) identified 33 EU banks with significant cross-border activities, 16 of which were active in at least half of the eurozone countries. They accounted for some 38.7% of eurozone banking assets.
Creating Europe-wide banking is far from straight forward
The integration of national banking in Europe into an EU-wide sector is progressing only slowly in contrast with other areas where “europeanisation” has been galloping. The eurozone’s unsecured money market reached in the ECB’s words “near perfect” integration as soon as the euro was introduced. Even in the equity segment, there has been a sharp increase since 1997, in investors’ holdings of shares from other eurozone countries when compared with foreign holdings of securities of non-euro area states.
Yet in the banking sector, even though wholesale banking shows signs of increasing integration, retail banking “continues to be fragmented” nationally says the ECB. Quite why, and what to do about it, is contested. Practical and cultural differences play a predominant role. Whether in Madrid, Rome, Liverpool or Helsinki, ordinary consumers feel more confident dealing when with a local bank.
According to Deutsche Bank, part of the problem is that the “minimum harmonisation” approach that has been followed to date has proven ineffective. National implementing laws have diverged too widely, especially in relation to consumer rules like deposit protection. This helps member states to retain regulations that insulate their own domestic banks from outside competition, to the disadvantage of consumers.
At the beginning of 2007, the Commission’s sectoral inquiry into competition in the retail banking market found grounds for concern over free and fair competition in the markets for payment cards, payment systems and retail banking products. These included large variations in fees, barriers to entry to markets, obstacles to customer mobility, product tying and supervisory, regulatory and other legislative measures hindering new market entrants.
Brussels believes the best way forward is new measures like the Consumer Credit Directive and the Payments Services Directive, coupled with pressure on private sector players to establish a Single European Payments Area (SEPA), and on governments to implement directives in ways that will facilitate the creation of a single EU financial market. But the route is likely to be bumpy.
Tackling the “blocked plumbing” of cross-border clearing and settlements
If the plumbing is blocked, water can’t circulate; the same is true of financial markets. The cash (liquidity) produced from selling a stock or a bond must be moved to the seller and the ownership of the securities transferred to the buyer. The pipes through which these operations are channelled − the securities clearing and settlement systems, or “post trade services” − may now be electronic, but if they are not efficiently integrated within countries and across borders, then financial markets will not function efficiently.
Inefficiency appears ingrained in Europe’s cross-border securities infrastructure, split as it is between a plethora of nationally based systems, international settlement engines and agent banks. Some estimates suggest the waste is equivalent to between 0.2% and 1% of the EU’s GDP. Hence the ECB’s decision to consider intervening directly by launching its own pan-European settlement system. The ECB estimates that at €35 the maximum cross-border settlement costs in the EU are more than ten times the cost of the same transaction in the US. That needlessly increases the cost of capital for companies.
The ECB believes the way to rectify this market failure is to construct its own securities settlement engine, Target 2 Securities (T2S). This would initially provide settlement for bonds and equities, and would in effect be bolted onto the cash payment system, Target 2 − that it launched last November.
The EU’s internal Market Commissioner Charlie McCreevy, no friend of state intervention, even by central banks, has secured an agreement from banks and other providers and users of settlement services on a voluntary code to provide for interoperability of the various structures, and non-discriminatory access to them with fair and transparent pricing. The Commission and the ECB say their proposals are complementary.
The ECB's proposals would, though, mean heavy investment yet uncertain success. It is uncertain, for example, that T2S would become the dominant system, as central securities depositaries, like Euroclear and Clearstream may choose not to use it. With Euroclear aiming to settle 65% of European equities, by market capitalisation, on a single system by 2010, some doubt whether the ECB needs to intervene at all. Fears amongst existing players of losing business to T2S could boost that consolidation process.
Simply getting the plumbing right is only part of the answer. In 2001, Alberto Giovannini, a former senior Italian Treasury official, submitted a report to the Commission by a committee of experts identifying 15 barriers to the provision of efficient, integrated EU cross-border post-trade services. Several reflected national legal and tax barriers. Yet most of these have remained untouched, leaving much work to be done to make integrated EU trading a reality.
Europe’s bid to set global insurance rules
Last July, the European Commission outlined proposals for what could be one of its most important financial services sector directives. The Solvency II Directive will establish a completely new regulatory system for Europe’s insurance industry, and may even allow the EU to set a new global standard.
With this reform, the Commission is seeking to eradicate the weaknesses in the EU’s insurance regime, comprised as it is of a hotch-potch of 14 different directives. The way EU insurance regulations are interpreted varies widely from state to state, and this is hindering the development of an EU-wide insurance market.
The historical principles underpinning insurance regulation vary widely across the EU, with some countries putting greater emphasis on serving the national interest and on consumer protection, while others provide for much greater freedom of action by insurers. There is no EU-wide early warning system to alert supervisors when a company may be encountering serious difficulties.
Solvency II would establish just such a system by setting out standard formulae for solvency capital requirements which, when breached, would trigger automatic supervisory intervention. The goal would be to ensure that intervention requirements would be harmonised, thus triggering intervention in the same way across the EU. There would also be a minimum capital requirement which, if breached, would stop an insurance company from doing business.
If successful, the new regime could not only see the EU taking the lead in shaping global insurance regulatory standards, but could also provide European insurance companies with a competitive advantage − especially over US rivals, which still face highly fragmented regulation.
Solvency II could benefit large and diversified insurers, like Allianz, Aviva or Axa, as the spread of their business lowers their overall risk profile. Commission officials estimate that up to 40% could be shaved from the solvency requirements of such players, potentially freeing-up huge quantities of capital.
Like the Basle II-based Capital Requirements Directive (CRD) in banking, on which it is partly modelled, the new Solvency II regulatory framework would have three pillars − a new capital regime, a quality of management assessment and a disclosure-based market discipline structure. But insurance companies, unlike banks, would be able to rely fully on internal risk models for establishing their capital needs, making Solvency II different from the banking industry capital adequacy regime which began, progressively, to come into effect in the EU at the beginning of 2007.
But there is more to defending the competitiveness of Europe's insurance industry than regulation. Policymakers will need to keep a watchful eye on the growth of tax-haven centres, such as Bermuda, where a growing proportion of the global insurance sector's capital is now raised. The Lloyd's of London insurance market has lost out to Bermuda especially, with Lloyd's underwriters like Kiln, Hiscox and Omega having moved their headquarters and domicile to Bermuda because of its attractive tax regime.
How Europe has joined America as global rule-setter
The EU’s move to take the lead in shaping global insurance regulation is in sharp contrast to its financial regulatory role. It isn’t so long ago that representatives from the US Securities and Exchange Commission (SEC) would come to Brussels to instruct their European peers on the rules they wanted to introduce.
The nature of the relationship saw a clear shift last April at the 2007 US-EU summit in Washington DC. German Chancellor Angela Merkel, as holder of the EU’s rotating Presidency, successfully argued for the establishment of a Transatlantic Economic Council to oversee a reduction in transatlantic regulatory burdens. Just prior to the summit, the SEC had come to an agreement with the German financial regulator, the BaFin, on information sharing.
In June of last year came a second success for the EU, when the SEC proposed the recognition of Europe’s International Financial Reporting Standards for foreign companies listed on US exchanges. Cooperation on accounting rules took a further step forward last November with an agreement between the European Commission and the SEC for overseeing the work of the International Accounting Board. Since then, the Washington-based Financial Services Roundtable representing the 10 largest US finance houses, has urged US regulators to adopt European-style flexible “principle-based” financial regulation.
Last July, the SEC adopted measures allowing companies to comply with certain aspects of the Sarbanes-Oxley rules in a less costly manner. That onerous legislation was born out of 2000’s dot.com bubble and the associated collapse of fraudulent corporations such as Enron and WorldCom.
American policymakers have apparently begun to realise just how far their attempts to impose US corporate governance rules extra-territorially had boomeranged to damage US financial competitiveness. The realisation that US regulations do not cross borders easily has been catalogued in reports by such eminent bodies as the Paulson Committee (named after US Treasury Secretary Hank Paulson) and New York Mayor Michael Bloomberg’s task force on “Sustaining New York’s and the US’s Global Financial Leadership.”
Both sides can also see that, given the increasing integration and inter-dependence of transatlantic financial markets, whether in the shape of the dominant role of the giant US investment banks in London or the symbolically and practically epochal decision to merge Euronext with the New York Stock Exchange, closer cooperation is not only in the interests of both parties but is vital to the financial stability of both. As joint standard-setters, the US and the EU have the capacity to influence the development of regulatory standards in the less mature financial markets of the world’s new Asian economic powers.
| This Europe’s World policy dossier was researched and written by John Adams, a finance journalist based in the UK and Stewart Fleming, a freelance journalist in Brussels. |