Early On, Europe Is Out Front in Overhaul of Global Financial System

Europe is moving rapidly to overhaul the global financial system in the wake of the economic crisis, pushing through new measures and proposing others that could impose significant restrictions on American and other firms based far beyond its borders.

In recent months, world leaders have agreed that a coordinated push for more rigid financial standards is paramount to preventing a repeat of the current crisis. That campaign, analysts say, is already yielding concrete results in Europe even as the Obama administration, set to announce its own broad plan for reforms next week, continues to mull its options.

The Europeans are now out front, for instance, in setting strict new standards for rating agencies and risk management at firms selling mortgage-backed securities. Europe has also seized the initiative in developing new rules to monitor hedge funds while forging ahead this week with plans to create two new powerful regulatory agencies in Europe, according to analysts and regulators.

Treasury Secretary Timothy F. Geithner today will conclude meetings in Italy, in part aimed at coordinating regulation efforts among Group of Eight nations, including major European powers, Canada, Japan and Russia.

The campaign across the Atlantic has global implications, in large part because even firms based in the United States may be compelled to follow Europe's tougher rules. For instance, under a draft proposal issued by the European Commission, the ruling body of the 27-member European Union, U.S. hedge funds may have to subject themselves to tight European oversight or be barred from doing business with European clients.

The scope of these efforts is generating a measure of friction, with U.S. officials as well as among some Europeans who favor a more cautious approach toward regulation, such as the British. The sense of alarm is even greater among financial firms that fear Washington may ultimately follow the path set by the Europeans -- historically more disposed to regulation than Americans.

"Not to put too fine a point on it, but we are very concerned," said Andrew Baker, chief executive of the Alternative Investment Management Association, which represents hedge funds based in Britain, the United States and elsewhere. "You have a situation where other countries may be committed to the path Europe is taking."

Europe's moves, at the same time, have raised the opposite concern: that major powers may take a go-it-alone approach to crafting new regulation, creating more, rather than fewer, differences in the way the global financial system is governed. Leaders have called coordination of such changes essential to doing away with the current practice of companies picking and choosing where to locate key operations based on which jurisdiction offers the most beneficial terms.

"This is what happens when regulators don't get together," said Mary Keogh, managing director of regulatory affairs for DVRS, the Toronto-based rating agency and the world's fourth largest. "You get a 'who's on first' global system with competing rules."

The tension underscores just how hard it may be to hash out details of new rules for the global financial system that are acceptable to governments and industries in far-flung corners of the world. The Europeans, for their part, say they are merely making good on international pledges to push forward with meaningful reform while the crisis is still fresh in the minds of politicians, business leaders and the electorate.

"I think there is a clear political will within the E.U. to address these issues, and they are doing so with relatively rapid action," said Stuart Mackintosh, executive director of the Group of Thirty, a think tank of central bankers, senior financial officials and academics. "You have a window of opportunity during which the usual inertia against reform is lifted, and if you don't act quickly, it will be harder to do so later. There is a certain danger of that happening in the United States."

U.S. officials dismiss the notion they are falling behind the Europeans, or that a breach on regulation is forming across the Atlantic. Although U.S. officials have privately raised concerns about parts of Europe's recent regulatory moves, they describe their differences with the E.U. as largely "technical."