Correction to This Article
This article about the United States and Europe being at odds over financial regulatory reform misstated the first name of Greece's prime minister. He is George Papandreou, not Andreas.

U.S., Europe at odds over global financial reform

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By Howard Schneider and David Cho
Washington Post Foreign Service
Saturday, March 13, 2010

A feud between the United States and Europe has cast doubt on the likelihood of a comprehensive global response to the financial crisis that nearly sparked a worldwide depression, according to regulators and analysts.

U.S. Treasury Secretary Timothy F. Geithner warned on Friday of the diverging approaches developing in the world's major financial centers, arguing that if the United States fails to take a convincing lead on financial reform it could lead to an ineffective patchwork of global regulation.

"The American financial system is strong in part because our firms operate globally," Geithner said in remarks at the Export-Import Bank in Washington. "If America cannot demonstrate its ability to act and reform our markets here, then other countries are going to decide they will go their own way on reform, and the American financial system will have to live with the risk . . . of inconsistent, different, competitively weaker standards for financial oversight around the world."

The chief concern is with Europe, the world's other major capital market, where officials want to deal more rigorously with some types of activity -- effectively barring U.S.-based hedge funds from operating there, for example -- while remaining more relaxed in areas where the United States has taken a tougher line.

Developing a roughly common set of regulations to govern the world's major financial centers is important, U.S. and European regulators agree: Without it, capital and investors will seek out the countries with the least restrictive rules, undermining the effectiveness of any new regulations and increasing the risk of future problems.

The United States is struggling toward its own version of financial regulation reform -- Sen. Christopher J. Dodd (D-Conn.) is expected to introduce major new legislation Monday -- and Obama administration officials are concerned that any effort here could be undermined by weaker efforts abroad.

European officials share that worry, though they have differing ideas about reform.

"There has to be convergence," said Amadeu Altafaj, spokesman for the European Commission on economic and monetary affairs. "Funds operate on a global scale, and it does not make sense to have divergent regulations among the key players."

The schism between the United States and the European Union reemerged this month when Geithner came out against new regulations on large investment funds being considered by European regulators. Using the language of an old-fashioned trade dispute, Geithner said in a letter to European internal markets commissioner Michel Barnier that proposed European restrictions on private equity and hedge funds "discriminate against U.S. firms and deny them the access to the E.U. market that they currently have."

Differences are emerging over the regulation of derivatives. A crisis in the financing of Greek government debt has led European leaders to call for a prohibition on some forms of those investments, something U.S. authorities are unlikely to endorse. Greek Prime Minister Andreas Papandreou visited Washington this week urging quick action to regulate the speculation in government-issued bonds that he partly blames for his country's problems, but he was met with a tepid response from the Obama administration.

The world's leading economies appeared to edge closer to formulating a global system of financial regulation at a summit in Pittsburgh in September, agreeing to coordinate on critical issues such as how much capital banks should hold, how much they should pay executives and what accounting standards they should use.

But critics say those agreements were easy to endorse because nations would not face any penalties if they broke their word.


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