Atlantic Council-Thomson Reuters

The Danger of Divergence: Transatlantic Cooperation on Financial Reform

This Atlantic Council-Thomson Reuters publication is also available at The Atlantic Council website.


Two years after the collapse of Lehman Brothers sparked a meltdown of the global financial system, we are at a crucial point that calls for us to step back and examine our progress in the effort to redesign the rules governing global financial markets. The immediacy of the crisis has passed, allowing for clearer analysis of the manifold causes and an evaluation of how the reforms that have been put in place match up with those causes. At the same time, the urgency of the process has not yet entirely dissipated and it is not too late to fill in any holes or to resolve conflicts created by differing approaches around the world.

It is good that real progress has been made. Comprehensive legislation has passed in the US and major pieces of legislation have passed in Europe, with more on the way. However, regulators have many important decisions to make, particularly in the US, and the remaining legislative agenda in the European Union (EU) includes critically important items. As the financial crisis recedes, there will be forces pushing for at least some essential reforms to be put off, watered down, or abandoned.

This is in part because of remaining disagreements over the best rules for the financial system; no legislation is ever perfect and the same issues that fueled such intense debate in crafting the current solutions will now be shifted to the more opaque world of regulatory action. This is set against a fundamental and profound change in the approach to financial markets. After all, it was not so long ago that deregulation was the order of the day. This latter point is a reminder that financial regulation is a work in progress that will necessarily evolve over time. We need the right initial framework and processes to maximize the chance that future changes are helpful and not harmful.

There has been a great deal of progress and global partnership in laying the foundation for managing the worst of the fallout that has plagued the global economy since 2007. The process is by no means complete, but the attention to the challenge and the level at which it has been addressed is truly significant. Leaders of the Group of Twenty (G-20) met four times in 14 months – and will meet for a fifth time in November – on a single, all-consuming issue. They moved rapidly, establishing the G-20 as the manager of the global response, and acted together to stem the cascading financial chaos that unfolded over 2008 and 2009 (see Appendix C for a summary of the relevant action steps endorsed by the G-20).

This report focuses on defining the major issues for transatlantic cooperation in their global context, analyzing the effects of proposed rules on the US and European economies, including the impact on the real economy and especially the business sector, and outlining concrete recommendations for policymakers. To do this, the report addresses the following questions:

  • What core principles should guide any recommendations on financial reform?
  • How do financial systems and market roles differ globally?
  • Was this just a “North Atlantic Crisis” requiring only a North Atlantic solution and that can be ignored elsewhere?
  • What are the institutional processes of the US and European governments that drive decisions on financial regulation?
  • How is international coordination being organized?
  • What were the causes of the financial crisis?
  • What is being done on each side of the Atlantic to fix the causes of the crisis?
  • What transatlantic regulatory conflicts need to be resolved and what differences are acceptable?
  • How will regulatory reform affect the economy?
  • How can financial reform efforts best be improved or extended?

The Atlantic Council, in partnership with Thomson Reuters, assembled a task force of experts from academia, think tanks, and the private sector, as well as government representatives, to discuss financial market reform and the state of transatlantic cooperation. Task force members provided information and perspectives on the issues covered in the report.

The views expressed in this report are inspired by conversations with the rapporteur and do not constitute a consensus view from the task force or a view from its individual members. Nor do the views expressed here necessarily represent the views of the Atlantic Council or Thomson Reuters.

Executive Summary

Transatlantic leadership is essential to complete the process of global financial reform. The good news is that the trend of transatlantic cooperation is clearly quite positive compared to pre-crisis days. For example, the degree of international controversy over Sarbanes-Oxley was vastly higher than the relative comfort with the Dodd-Frank regulatory reform bill recently passed in the US. Current reform efforts are also addressing serious failures in regulatory cooperation, including a failure to consult effectively across borders about systemic risks and to exchange detailed information about such risks and the maintenance of substantially different capital standards for banks in the US versus the rest of the world.

Yet there is a great deal left to do, and leadership from the US and Europe is especially important now, since, surprisingly, the easiest work of the G-20 may be behind it. As countries begin to concretely define their regulatory plans, it becomes harder to paper over some very real differences that were obscured by the urgency of managing the crisis. Yet, the need for cooperation is similarly at its highest. This report is timed to encourage continued emphasis on the need for international cooperation and, crucially, to urge the transatlantic community to continue leading this effort.

We offer a number of suggestions to improve the process and outcome of financial reform, listed below. These are explained in greater detail in the Recommendations section.

Finish the key regulatory reforms
There are a large number of issues that remain to be completed, including the writing of a substantial number of regulations. The Dodd-Frank bill alone has hundreds of rulemakings that are the province of many different regulatory bodies. In addition, there are some major outstanding issues that can only be handled either by international bodies, or domestically within the US or EU member states. It is essential to maintain momentum on these reforms.

  • Finalize the Basel III accord without sacrificing its strength
  • Design reforms to achieve the necessary safety at the lowest economic cost
  • Jointly engage major Asian countries and other emerging markets in financial reform
  • Harmonize the regulation of financial market infrastructure
  • Fix the housing finance system in the US
  • Address the underlying macroeconomic, social, and political causes of the crisis
  • Stay focused on key unresolved structural issues

Resolve transatlantic conflicts
There are a small number of conflicts between the US and EU that are particularly troublesome. These tend to center around different underlying beliefs in the purpose of government, the market, and regulation. It is best to address them head-on. It is unlikely this will change the underlying beliefs of either side, but an honest conversation about the conflict is the only way to find solutions that mitigate differences.

  • Demand that consistent global accounting standards be applied by all parties
  • Find compatible approaches to regulating hedge funds and private equity funds
  • Coordinate approaches to credit rating agencies

Repair the supervision process
There is also a subset of issues that both sides agree are essential, but that are fundamentally vexed questions. Unfortunately, these also happen to be areas that are most likely to lead to another crisis if not resolved.

  • Improve banking supervision and hold regulators accountable
  • Create effective rules for dealing with cross-border banks that run into trouble

Enhance the processes for global cooperation
The coordination processes at the international, transatlantic, and bi-lateral levels are present, but vary greatly in quality and content. There is a strong need to deepen, better structure, and better coordinate a number of these efforts.

Engage Congress and the EU Parliament more deeply in international discussions of reform

  • Establish better forums for discussions of transatlantic financial reform issues among all parties
  • Define a clear, robust future for the G-20, linked to existing multilateral institutions
  • Coordinate macroprudential policies globally
  • Coordinate carefully any significant changes in taxation of financial institutions or transactions