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U.S., Europe fall out of step on global financial reform

European officials should be "making it clear to the markets and the international community they have good strong rules in place to ensure the capital base of the banking system going forward, which would help their economic recovery, which in turn would help the rest of the global economy," Federal Deposit Insurance Corp. Chairman Sheila C. Bair told Bloomberg News while in Beijing on Tuesday. "There have been a lot of concerns about what will happen in Europe and to what extent it could impact the Chinese economy and the U.S. economy."

Points of commonality

In principle, U.S. and European leaders have found much common ground. For instance, they agree that markets and banks need more oversight and that investors, depositors and the financial industry more broadly -- rather than taxpayers -- should pay the tab for future crises. On Wednesday, Geithner is set to lay the groundwork for an agreement on common goals to be signed at an economic summit in Toronto next month.

Officials on both sides of the Atlantic say the divergence in practical approaches reflects cultural and legal difference that can be resolved. "It doesn't mean that if we take one structural measure and the others don't follow, that we're hitting a major bump in the road or that we aren't pursuing our common agenda," said an Obama administration official who spoke on the condition of anonymity.

The world's largest economies have agreed to let a committee in Basel, Switzerland, set international standards for how much money banks should hold in reserve to protect against unexpected losses.

Geithner has said that new capital standards are at the heart of reforming the global banking system, and the financial overhaul bill on Capitol Hill largely defers to the Basel committee to set the standards. Some Europeans complain they have found it hard to coordinate with the United States over the Basel process.

In striking out on a different path than the Europeans, the United States could force them to rethink their approach.

In Britain, for instance, the coalition government elected this month is setting up a commission to study whether big financial companies should be broken up to ensure that they are not too big to fail. But the British, who don't want to be at a competitive disadvantage, are unlikely to adopt this approach if the Americans don't. The U.S. legislation would leave banks largely intact, instead bulking up federal oversight.

"If the Americans don't do it, let's face it, we won't do it, either," said Ray Barrell, director of macroeconomics at the National Institute of Economic and Social Research in London.

Dennis reported from Washington.

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