Connecting The Global Regulatory Agenda

This article was contributed by Thomson Reuters Exchange, a robust forum for dialogue, where ideas, insights, and information, are shared across the global financial ecosystem.

Sharon Bowles, retiring MEP, Chair, Economic and Monetary Affairs Committee European Parliament and David Craig, President, Financial & Risk, Thomson Reuters exchange views.

The financial crisis demonstrated that cooperation on regulation and oversight of the global financial system has never been more important. Regulatory divergence is not only economically costly; it encourages regulatory arbitrage and can also introduce duplicative or inefficient practices for both providers and users of capital, thereby undermining global economic growth.

David Craig: Whilst American and European regulatory practices have diverged in several crucial areas – banking oversight, derivatives regulation and privacy protection – they have otherwise been to date remarkably consistent. Reforms are moving ahead, but gaps continue to arise which can undermine both efficiency and stability. Where do you see leadership on these issues coming from?

Sharon Bowles: (That is) the million dollar question. Many want to see international regulatory bodies playing the leading role. On the one hand there is a strong case for this, and they have to have a big role, but it leaves a democratic deficit and is not proven to escape ‘group think’. At the moment the FSB and Basle are also dominated by central banks. These central banks did not themselves escape group think before the financial crisis, nor do they have the full range of expertise and understanding on the markets, insurance and fund management side of things.

I think the answer is that the combination of G20 and international regulatory bodies is the best that we have got, but those clubs at the moment are too exclusive, and that at least in the EU there has to be earlier involvement of the political level.

David: The US and the EU are clearly leading players in the G20 and in global regulatory bodies like the FSB in Basle. They seem to have delivered a very similar set of new rules, with the G20, notably on derivatives and on banking capital. Yet we hear a lot from industry that the rules, despite appearances, do differ and on occasion conflict with each other. From your perspective in the European Parliament, how well have the two sides cooperated? Do they deliver convergent outcomes?

Sharon: My experience has been that rules come out as if there were some generic financial system and this is not the case. EU applies Basle to all its banks, not just the big ones, so there have to be inbuilt provisions for proportionality. Maybe moving forward, if there is not a whole tsunami of legislation to deal with, there might be opportunity for greater parliamentary scrutiny before getting to the final stages because otherwise there will continue to be changes made at later stages.I think the US and EU have cooperated well although from my side it often looks as if the US regards cooperation as doing what it wants and expecting the EU to agree. Dialogue is important and we have got to get to a place that is a great deal better, by which I mean convergent, than it could have been.

David: How important is convergence? Different territories have different histories and market structures, and so maybe some divergence is normal.

Sharon: Some divergences are normal. In general these should be small. Every territory will put itself first; there is no way to escape that. In the EU there already have to be compromises given that the EU is not one country and has itself internal differences in history and structures. However the international considerations should be kept in mind right from the start, often they can help in reaching the internal EU compromises. That is a process that is not sufficiently developed within the EU itself.

David: What are the areas where you think divergence can have the most damaging effect? Do you worry about arbitrage, for example in Asia?

Sharon: Transatlantic cooperation is a good thing for greater understanding but it should not be the tool of trying to shut out or dominate what happens in Asia. Long term that is unlikely to succeed. There was a time when the Asian regulators seemed to play ‘wait and see’ in some areas, now I think they are moving to wanting greater involvement. Of course there are things that we can learn from other jurisdictions too.

David: In terms of the global agenda, what are the remaining gaps that need tackling? Have we really addressed the TBTF problem?

Sharon: Too big to fail is still not fully tackled, nor indeed fully understood. The nature of TBTF may vary country to country. Within the Eurozone there is still a lot to learn about the interconnection of banks and sovereigns and how to address the lack of flexibility that monetary union creates. Absence of the ability to depreciate the currency may mean that there are limits to the size of banking sector that can be absorbed in the event of crisis. Others are also wondering whether to some extent this applies to the Eurozone as a whole, that it is impossible to absorb a systemic banking crisis if there is not the ability to use the full range of monetary tools that inevitably lead to devaluations. We all hope that the agreed rules on bail-in resolve many of these problems, and in the limited way in which this has already been tested in the EU there are reasons to be optimistic.

David: In terms of the EU, your ECON chairmanship has seen a huge change, both in the development of a banking union and in delivering key regulatory reforms such as Basle III (CRD 4), derivatives (EMIR), hedge funds, credit rating agencies and market abuse. What are the remaining challenges for your successor?

Sharon: The focus in the next five years may well turn much more towards growth and how to promote that. This puts fund management in focus and of course that has already started with the consideration of whether there are TBTF issues there. Undoubtedly there will be fallout from some of the vast amount of regulation that has already been done, sometimes in haste, and there are massive amounts of rules, our so-called level 2 measures, that have yet to be completed and go through scrutiny procedures. Alongside that there will be all theimplementation of banking union and further development of the monetary union.

Read the report:

The Danger of Divergence: Transatlantic Financial Reform & the G-20 Agenda, produced through a partnership between Thomson Reuters, the Atlantic Council and TheCityUK, examines the sources, risks and costs of divergence in transatlantic financial regulation and calls on the US and EU to reenergize efforts to coordinate implementation of the G-20 regulatory agenda.

David Craig

David is president of the Financial & Risk business of Thomson Reuters. Prior to his appointment in 2011, David founded and headed up our Governance, Risk and Compliance business and served as chief strategy officer at Reuters PLC. He has held senior level roles including partner at McKinsey & Co, and is currently a board member of the Atlantic Council based in Washington DC as well as a board director of the Thomson Reuters Foundation.

Sharon Bowles

Sharon Bowles has chaired the European Parliament’s Economic and Monetary Affairs Committee since 2009, putting her at the heart of the EU’s response to the financial and Eurozone crisis. A frequent participant at conferences alongside Ministers, European Commissioners, and Central Bank Governors, Sharon contributes new ideas and brings together technical and political analysis. Prior to entering the European Parliament in 2005, Sharon was a partner in a firm of European Patent and Trade Mark Attorneys that she founded.

Enjoy this article?

Get your FREE full-copy of Thomson Reuters Exchange Magazine for iPad and Android tablet devices on the Apple App Store, Google Play, or the Amazon Appstore. Or, get your free single article by visiting the Thomson Reuters Exchange Website.