Keep Financial Regulation Out of U.S.-EU Trade Talks

Michael Barr

The United States and the European Union have embarked on a new round of trade talks, which holds out the promise of deepening the two sides’ already robust economic relationship. But the talks should not be used to weaken U.S. financial reforms that are just taking root.

The EU’s Commissioner for Internal Market and Services, Michel Barnier, has been barnstorming the U.S., looking for support to include financial services as part of the talks on the proposed Transatlantic Trade and Investment Partnership. Meanwhile, the financial industry is pushing the talks as a way to overturn the pesky – and highly effective – rules being implemented in the U.S. under the Dodd-Frank Act.

Tough new rules on derivatives, capital requirements, financial structure, consumer and investor protections, and the like could be jeopardized in the trade talks, with the U.S. Congress able to hold only an up-or-down vote on a final agreement, which would encompass a broad range of topics. And other commentators view the talks as another forum for cooperation, hoping that trade negotiations will improve coordination among financial regulators.

The U.S. would be wise to reject that view.

Now is not the time to place America’s hard-fought financial reforms at risk. Shadow banking is coming into the light; new derivatives regulation is entering into force; capital requirements are going to be higher; structural reforms and resolution authority are reducing subsidies; and investors and consumers are better protected.

The financial industry battled against this new legislation. It lobbied regulatory agencies and Congress to delay or weaken reforms after they were enacted; urged Congress to block key nominees and withhold essential funding; and launched aggressive lawsuits to stymie implementation of important rules. The last thing that the U.S. (and the EU) needs is to enable the financial industry to have another bite at the apple. And that is exactly what trade talks – and subsequent Congressional votes – would do.

To be sure, there have been sharp disagreements between the U.S. and Europe over elements of reform. Until this month, the U.S. Commodity Futures Trading Commission had been at odds with Barnier over the territorial scope of U.S. derivatives rules. Likewise, the Federal Reserve’s proposed capital and holding-company requirements for foreign firms operating in the U.S. – while better than national treatment and, in my judgment, prudent – deeply angered the European Commission. And the U.S. has been concerned about providing for national treatment in European rules governing derivatives, as well as rules regarding hedge fund managers.

Yet there are plenty of other fora in which to resolve disagreements between U.S. and European regulators, including the bilateral process that resulted in the recent agreement between the U.S. and Europe on a framework for derivatives regulation. The G-20 has been driving financial reforms at a global level; the Financial Stability Board pursues agreement among regulators; and technical teams at the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors hash out industry-relevant reforms.

The last thing we need is another process, particularly one not focused on how to prevent another financial meltdown like the one from which the U.S. and Europe are still trying to recover. Trade talks would merely serve as a one-way ratchet to pull back from reforms, not advance them.

Globally, there is certainly much work still to be done. On bank resolution, the U.S. has a solid framework in place, but is still working through how to make winding down a major financial firm plausible; in Europe, there is agreement on the need for resolution authority, but a lot more to do to make this authority work within the context of EU member states’ legal and political frameworks.

On derivatives, there is now general agreement on how to approach trading, clearing, and transparency, but much more work to do on capital requirements, margin requirements, clearinghouse supervision, and other issues. Capital and liquidity rules are taking shape, but a final agreement is still on the horizon, rather than close at hand.

I am all for a stronger, harder push to reach global agreement on core reforms. In fact, such an agreement is essential in order to reduce the chances of another devastating global financial crisis. But there is no reason to seek to accomplish this through trade talks that would likely weaken, not strengthen, the forces of reform.