Contact: Thomas FischerE-mail: thomas.fischer@bertelsmann- stiftung.deTel: (+32 2) 280.2830www.bertelsmann-stiftung.de/brussels
KEY POINTS
• Unlike the US all-in-one approach to meeting G20 provisions for new banking and financial regulation, the EU is taking a piecemeal approach.
• In September, the EU passed comprehensive macro- and micro-prudential oversight and introduced proposals for new derivatives regulation.
• The Obama administration is closely monitoring discussions about transitioning from private placement to the passport system for US hedge funds and private equity in the EU, as envisioned in the Alternative Investment Fund Managers Directive.
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p European Commissioner Michel Barnier, responsible for EU banking and financial-services regulation, wants more stringent regulation.
ABOUT THE BERTELSMANN FOUNDATION: The Bertelsmann Foundation is a private, nonpartisan operating foundation, working to promote and strengthen trans-Atlantic cooperation. Serving as a platform for open dialogue among key stakeholders, the Foundation develops practical policy recommendations on issues central to successful development of both sides of the ocean.
Area US Action EU Action G20 Commitment Notes Comment
Capital Requirements No new firm limits; establishes floor for capital that must not fall below current limits. US has agreed to implement Basel II and trading-book requirements by the end of 2011.
Capital requirements for trading-book positions significantly increased. Separate and higher capital weightings for securitization and re-securitization positions; strengthening of banks’ internal models to reflect highly stressed scenarios.
Reinforced prudential regulatory standards, development of internationally comparable measures for risk-based capital requirements and adoption of Basel II capital framework.
No convergence possible until US implementation of Basel II. Positive indications at executive and regulatory levels must be reflected in Congress. Lobbying led Basel to transition until 2013 implementation of capital rules for securitization positions outside correlation trading portfolio.
Latest Basel agreement (September 2010) on levels and components of core capital should result in significant changes and, optimistically, greater convergence in run-up to 2013 deadline for capital rules and securitization positions.
Securitization Originators of “subprime” mortgage-backed securities to retain 5% “skin in the game”; provide greater disclosure on quality of underlying asset.
Originators of all securitized positions to retain at least 5% “skin in the game”. Strict due diligence procedures for originators and investors. If an investor does not comply with the due-diligence rules, a capital penalty charge applies.
Originators should retain a part of the risk of the underlying asset.
Rules more or less equivalent but scope of US provisions much narrower than those of EU and focus primarily on the “crisis” problem – “subprime” mortgage-backed securities
Stricter rules for securitization positions one of the first legislative reactions of the EU to the crisis. US followed but only in applying the 5% “skin in the game” for “subprime” mortgage-backed assets. Thus, considerable difference in application of rules between EU and US.
Derivatives Mandatory central clearing and exchange trading for derivatives to be determined by Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission. Code of conduct for dealers and participants. Transparency of transactions through trade repositories. Banks prohibited from in-house derivative operations except those related to interest-rate, foreign-exchange and high-quality credit swaps. Corporate end-users provisionally exempt from margin, capital and clearing requirements.
Provisional plans envisage new EU capital-markets authority determining which products to be subject to mandatory central clearing. New transparency, risk, prudential and ownership requirements for central counterparties (CCPs). All over-the-counter (OTC) trades to be recorded by trade repository. Some exemptions from requirements for non-financial firms. No restrictions on banks running in-house derivatives operations.
All standardized OTC derivative transactions to organized exchanges.
Some differences related to corporates and in-house derivative units at banks and mandatory exchange trading. Potential differences in scope, but general convergence on the treatment of standardized products and OTC, and role of CCPs and repositories therein.
More ambitious plans to separate derivatives from banking in US lost during Dodd-Frank negotiations. Never considered at EU level due to support for universal banking model. Some concern in the US on separation of supervision between two agencies.
NOTE: Table prepared by the office of Peter Skinner, MEP
Inspiring People. Shaping the Future.
WASHINGTON, DC1101 New York Avenue, NWSuite 901Washington, DC 20005 USAContact: Tyson BarkerE-mail: tyson.barker@bertelsmann-
Area US Action EU Action G20 Commitment Notes Comment
Proprietary Trading Volcker Rule prohibits investment by bank entities of more than 3% of Tier 1 capital in proprietary trading.
None None European attachment to universal bank model hinders convergence. Individual EU member-states may follow US lead.
Lack of EU action the result of heavy lobbying in/by certain member-states. Perception that EU is trailing the US in its willingness to tackle taxpayer risk inherent in existing banking structures.
Investor/Consumer Protection
Creation of consumer-financial-protection watchdog with autonomous powers to write rules for consumer protection. Greater powers and funding for SEC to ensure protection of investors.
Limited to investor/consumer protection mandate within new EU sectoral supervision authorities, though further legislation related to corporate governance of financial firms and reform of market-abuse directive anticipated.
None Variation in consumer-protection laws among member-states makes creating an EU body with significant powers difficult in short term. Individual member-states considering body similar to US watchdog.
US showing strong lead in consumer protection, though some worry that rulings by watchdog could conflict with prudential supervision concerns. Lack of ambition from EU authorities to address consumer protection even through non-statutory body unsatisfactory, particularly given EU’s general emphasis on consumer rights.
Crisis Resolution Creation of orderly liquidation authority for wind-down of systemically important institutions. Funds needed for liquidation to come from Treasury, clawed back from industry ex-post. Banks to produce living wills.
Provisional plans envisage ex-ante fund for orderly wind-downs funded by levy on banks and built on harmonized system of national funds. Some role for new banking authority in ensuring coordination of resolution. Banks to produce living wills.
Policy framework to include resolution tools, strengthened prudential and supervisory requirements, and core financial-market infrastructures.
Agreement that a process needs to be put in place, but significant divergence in ex-post versus ex-ante resolution funding. EU plans likely to run into difficulties due to resistance to ex-ante fund among certain member-states.
Neither US nor EU proposals likely to overcome issue of “Too Big To Fail” given non-separation of investment and retail banking activities. US system of ex-post funding for liquidation seems more realistic approach given difficulties of administering pre-funded resolution fund. Work on living wills in both jurisdictions positive.
NOTE: Table prepared by the office of Peter Skinner, MEP
Inspiring People. Shaping the Future.
WASHINGTON, DC1101 New York Avenue, NWSuite 901Washington, DC 20005 USAContact: Tyson BarkerE-mail: tyson.barker@bertelsmann-
Area US Action EU Action G20 Commitment Notes Comment
Accounting Standards SEC considering move to International Financial Reporting Standards (IFRS); decision expected in 2011. Favors full “fair value” model for financial instruments rather than “mixed measurement” model (fair value and amortized cost) preference of IFRS.
EU officially committed to IFRS but has delayed endorsement of IFRS 9 approach on financial instruments due to pressure from certain member-states and stakeholders.
Simplification of standards for financial instruments, clarity and consistency for international valuation standards, and move towards global standards for accounting.
Convergence still possible in 2011 but different views on accounting for financial instruments makes that difficult.
Convergence is critical for meeting G20 commitments and for US to move to IFRS. EU approach in line with G20 commitments, but signs of unrest in certain member-states over aspects of IFRS standards could overshadow progress.
Credit Rating Agencies (CRAs)
New requirements include specific CRA supervision unit within SEC, transparency of ratings methodologies, new rules to prohibit conflicts of interest, and removal of requirements for credit ratings for certain forms of investment. Creation of CRA liability for reckless use of information.
CRA supervision to be moved to new EU capital markets authority, which will have significant powers of inspection of CRA activates. New rules to require greater disclosure of information provided by rated entities to CRAs, allowing for unsolicited ratings.
CRAs used for regulatory purposes subjected to regulatory oversight - consistent with International Organization of Securities Commissions (IOSCO). Enforcement of compliance by national authorities.
Convergence on greater transparency and specific supervision of CRAs, but significant differences remain on rules and liability.
US and EU following different strategic approaches to CRAs. US looks to reduce overall reliance on ratings for investment decisions; EU wants greater competition for “Big 3” CRAs on ratings.
Hedge Funds Requirement that hedge funds and private equity firms register with SEC; greater role for state supervisors.
Comprehensive new rules governing structure, activities, marketing, capital and liquidity requirements, depositaries, remuneration, third-country funds and consumer protection for all non-UCITS (Undertakings for Collective Investment in Transferable Securities) funds.
Funds must register with relevant authorities and provide relevant and timely information, including on leverage.
Significant contrast between stringent EU rules driven by domestic political considerations and US rules more in line with high-level G20 commitments.
While EU regulation of hedge funds seems excessive and ill-considered in parts, US regulation looks weak given numerous investor-protection failures related to hedge funds and potential pro-cyclical role of hedge funds in crises. Potential for trans-Atlantic problems from restrictions of non-equivalent funds in EU not reflected in more open US approach.
NOTE: Table prepared by the office of Peter Skinner, MEP
Inspiring People. Shaping the Future.
WASHINGTON, DC1101 New York Avenue, NWSuite 901Washington, DC 20005 USAContact: Tyson BarkerE-mail: tyson.barker@bertelsmann-
Area US Action EU Action G20 Commitment Notes Comment
Remuneration Enhancing role of shareholders and internal committees in oversight of pay, but no statutory controls. Federal Reserve to provide guidance on remuneration in line with G20 accord; details left to qualitative discussions between regulator and individual firm.
Comprehensive new rules linked to capital requirements for banks, copied over for non-UCITS investment funds. Includes linking bonuses more closely to salaries, limiting cash values in bonuses, issuing bonuses in non-cash instruments such as shares and establishing a claw-back mechanism.
Deferral of variable pay for senior executives, restrictions on compensation where necessary to rebuild capital base, and banded disclosure requirements.
Divergence likely given US case-by-case approach versus EU blanket legislation. Concern in US that prescriptive rules could be unconstitutional.
EU copy-over of rules to funds looks inappropriate, but could still be workable due to proportionality clause. New US rules unlikely to address the negative role remuneration practices played in encouraging risky behavior by bankers.
Supervision Creation of financial-oversight council to monitor systemic risk and supervise, if necessary, systemic institutions; abolishes dedicated thrifts supervisor and shifts responsibility to Office of the Comptroller of the Currency and the Federal Reserve.
Creation of macroeconomic oversight board and three sectoral authorities to coordinate activities of national supervisors and develop single rulebook for financial-services regulation.
Support for IMF surveillance of economies and financial sectors. Supervisory colleges for major transnational firms. Expansion of regulatory systems to monitor macro-prudential risks.
Convergence on creation of macro-systemic monitoring body, but significant divergence on micro-level supervision (sectoral (EU) versus sectoral and systemic (US)).
New US system appears to compound problems created by patchwork approach to supervision. Additional responsibilities for Federal Reserve for systemically risky institutions create uncertainty about the location of ultimate responsibility for supervision. EU approach more satisfactory: clear lines of responsibility and potential for greater EU coordination of supervision going forward.
Insurance Creation of Federal Insurance Office within Treasury that can gather information, streamline communication among state-based insurance supervisors and contribute to negotiations on international agreements.
None None US still leaves insurance regulation in the hands of state supervisors. EU insurance regulation consolidated under Solvency II, which was developed prior to financial crisis.
Inability of US legislators to overcome state-based objections to more centralized approach to insurance regulation and supervision.
NOTE: Table prepared by the office of Peter Skinner, MEP
