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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

By Howard Schneider and David Cho
Washington Post Foreign Service
Saturday, March 13, 2010; A01

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.

At the summit, U.S. officials underscored the need to raise the capital levels at banks to protect these firms against unexpected losses. In response, U.S. banks have disclosed most of their losses while raising about 87 percent of the capital that they need to cover those write-downs, according to International Monetary Fund data.

European banks have been less forthcoming, admitting to only about a third of their likely losses, and raising less than half of what they need to cover the write-downs revealed so far, the IMF said.

Without a central authority akin to the U.S. Federal Reserve, "lots of European banks are actually, at this point, protected by their home countries, which don't really want full transparency to be applied," said Nicolas Véron, an analyst at the Brussels-based Bruegel think tank, in an interview recently published by the Peter G. Peterson Institute for International Economics.

On executive compensation, the nations have struggled to hammer out detailed agreements, beyond the broad commitment to crack down on pay packages that reward excessive risk-taking. Britain imposed a one-time 50 percent tax on banker bonuses. The United States has pushed big banks to offer compensation that is tied to their long-term performance. In continental Europe, where banks can hold strong political influence because they are so large relative to the size of individual economies, many executive pay packages are still offered in cash regardless of how the firm performs.

Obama administration officials played down these differences, saying that not every country has to adopt the exact same methods, as long as the global regulatory network does not have major holes that can be exploited by big financial firms.

Combined, the disagreements demonstrate how difficult effective global regulation remains in an era in which capital moves easily across borders but the rules for institutions and traders are set by different national governments with their own political priorities.

Translating the Pittsburgh principles into new rules has left Europe and the United States acting "like two huge unilateralist powers," Véron said.

And the difficulties are not just at the transatlantic level. Within the European Union, the differing approaches of major powers such as France and Britain have stymied development of new European policies.

"It is a tough job internally as well," Altafaj said.

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