It’s Time for the U.S. and Europe to Cooperate on Financial Services Reform

The United States should use the upcoming negotiations with Europe on a Transatlantic Trade and Investment Pact (TTIP) to push cooperation forward on key financial reforms. We have moved from strong transatlantic agreement in 2009 and 2010 on the principles of financial reform to wandering in a morass of details and conflicts over parochial interests. Normally, one would not think of mixing trade negotiations with critical and complex financial regulations, especially given the crucial importance of financial stability. However, finance is a global business that is dominated by North America and Europe and the TTIP negotiations may give us a chance to better coordinate its regulation. Failure to coordinate will make finance more expensive, slow our economies, and cost jobs.

While political issues may force some exclusions (the French, for example, want to exclude areas that might “endanger” their entertainment and cultural industries), there does not appear to be nearly that level of sensitivity about financial services, at least if the treaty goals in this area are narrowly defined.

Thus, for financial services, it’s not an “if” it’s a “what.” Virtually everyone can agree that tariffs and equivalents, and “market opening” measures are appropriate to consider. However, there are few or no tariffs in financial services across the Atlantic and relatively few areas of disagreement on market access. (There remain some issues about access by US funds managers and rating agencies to EU markets, for instance, but these are minor by comparison with other trade issues.)

Level the play field

The central point is whether to use the treaty negotiations as an opportunity to better coordinate financial regulation as the two sides of the Atlantic proceed forward on major revamps of regulation that reflect the lessons of the financial crisis. Finance is a highly regulated industry and the nature of the rules has a strong impact on the relative competitiveness of different financial institutions. Therefore, a level playing field for firms on the two sides of the ocean can only be achieved with appropriately coordinated regulation.

Three years ago, we examined the state of transatlantic cooperation on financial reform, and were optimistic, while still pointing out dangers of divergence. The US and Europe had a common commitment to financial reform and similar views about how to accomplish it that were publicly committed to by the leaders of the G-20 governments, including ours. There also appeared to be a real recognition that coordinated actions must be taken, given the intertwined nature of our national financial systems.

Sadly, cooperation has visibly deteriorated in the last 12-18 months, despite the continued need for action and a consensus on the broad answers. Parochial interests and differing national inclinations about key implementation issues have been steadily chipping away at the momentum. Perhaps some of this was inevitable as the urgency of the crisis faded and as we moved from principles to actual decisions, especially given our differing legal and economic systems. The truth is that we have plenty of parochial infighting and differing views just within the US regulatory system, much less across borders.

But, we must not give in to defeatism or complacency about transatlantic coordination—TTIP could be the solution by framing the problem as one of international cooperation that ensures higher economic growth and greater stability for all sides.

High-level regulation

What does this mean practically? Financial regulation is too complex, and judgments about it too subjective, for the treaty to contain explicit rules that can be arbitrated by a body equivalent to the World Trade Organization. What can be done is to achieve a re-commitment at the highest levels to the previous G-20 principles on financial regulation and the subsequent Basel III accord on bank capital and liquidity, with more to come in the TTIP negotiations—all of which should include a reporting mechanism to national leaders about the state of progress in transatlantic cooperation on financial reform. Further, there ought to be a mechanism for either side to appeal to a specialized body for mediation to help iron out differences. Note that this is not arbitration: if the two sides remain in disagreement, then nothing would be forced on them.

Government officials and regulators do not like to be put into the position of having to defend themselves to national leaders, which could work to resolve miraculously a number of differences just in time to meet reporting deadlines.

One concern that is expressed about including financial services is a misplaced fear that the Europeans will push to water down rigorous US regulatory proposals. First, we do in fact agree with the Europeans on the core issues.  While they are taking longer to formulate specific regulations, this is not a stalling device; it reflects the problems of multi-country decision-making. In some areas, the Europeans are proposing stricter and perhaps better rules than our own.  Second, the non-binding approach advocated here would allow us to hold firm on anything we feel is critical while giving us a forum that should be at least as effective in pushing Europe as it would be in allowing them to push us.

Cynicism and pessimism are reasonable viewpoints when dealing with trade issues and with financial regulation, they do real harm if we allow them to stop us from trying to move forward. There are strong common interests and viewpoints on the two sides of the Atlantic on these issues. Designing a mechanism within TTIP to encourage agreement and to push back against parochial interests is a reasonable goal and one that could pay real dividends.