U.S. Largely Going It Alone On Regulatory Reform

WASHINGTON — When it comes to financial reform, the gap between the U.S. and other countries appears to be widening.

That was the takeaway from a conference of international bankers here on Monday, with one attendee, speaking of the treatment of "too big to fail" institutions, calling the gulf a "Grand Canyon."

In many respects, the Dodd-Frank Act catapulted the U.S. way ahead of the pack in overhauling regulation following the 2008 crisis, including swaps oversight, a facility for resolving failing firms and a ban on banks' proprietary trading.

But participants at the Institute of International Bankers meeting raised questions about whether the global overhaul can work without nations speaking with one voice.

"These issues are very complex and the possibility of divergent views among international regulators is very real," said Jill Sommers, a board member on the Commodity Futures Trading Commission.

Focusing on the swaps provisions in Dodd-Frank, Sommers sounded alarm over the pace of progress U.S. regulators have made in harmonizing rules with other nations.

"I'm deeply concerned that there has not been adequate coordination with the" Securities and Exchange Commission "and the international regulatory community," she said. "Of even greater concern to me is that the [CFTC] appears to be considering a piecemeal approach to issues of extraterritoriality by proposing guidance in stages rather than by proposing one comprehensive rule that will give market participants some degree of certainty. … I cannot imagine the global consequences of an inconsistent approach to these issues by the SEC and the CFTC."

Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., suggested that despite the rigorous efforts to harmonize rules — including multiple accords to coordinate capital requirements through the Basel committee — regulation was still to largely every country for itself.

"When I look behind global pronouncements to analyze national implementation, high-minded standards all too often break down into divergent requirements loosely grouped under the moniker 'Basel III,' doing more to confuse than reform financial markets," Petrou said. "Is this because nation-states just can't play nice or is it, rather, that banking is, for all its cross-border operations, still at heart a home-country affair?"

Petrou said the "Grand Canyon" was the distance between the apparent end to TBTF in the U.S. compared with its preservation in other nations.

"Here lies the great divide — Dodd-Frank dooms TBTF, but the" European Union "is, as I said, enshrining it," she said. "Other nations have yet even to address it because it's so fundamental a premise of banking that to mention withdrawing government backstops is to blaspheme.

"Over time, the EU may retract its effective guarantee and other nations could do the same if pending global resolution standards issued by the Financial Stability Board are implemented in full. But it's still a totally open question if this will occur and I think it will be very hard to retract the safety net spread so securely beneath most large banks."

Policymakers invited to speak addressed how leading nations can move forward to coordinate their rules.

"While regulations are adopted at the national level, markets are global and difficult cross-border issues are bound to arise. This is complex terrain, and we must work hard to align our national frameworks and develop high-quality international standards," Mary John Miller, assistant Treasury secretary financial markets, said in prepared remarks. "We should strengthen international coordination and always keep in mind our collective goals to protect the safety and soundness of our markets; to achieve a level playing field globally; and to realize the economic benefits of global finance."

But even Miller acknowledged that other nations do not appear to be moving forward on certain requirements, such as the Volcker Rule, which bans proprietary trading and limits investments in hedge and private equity funds.

"In certain areas, U.S. reforms are tougher or just different from the rules forthcoming in other markets, so we need to figure out sensible ways to apply those rules to the foreign operations of U.S. firms and the U.S. operations of foreign firms," Miller said. "This is very complicated, and another example of where we need a clearly articulated consistent approach across the U.S. regulatory agencies.

"The Volcker rule provides a good example of an area where the U.S. is pursuing reforms to reduce risk and conflicts of interest, but where most other nations have not followed."

On coordinating the resolution authority mandated by Dodd-Frank — which authorized the Federal Deposit Insurance Corp. to seize failing firms deemed systemically important — acting FDIC Chairman Martin Gruenberg applauded the FSB for drafting key principles for countries to adopt consistent approaches to cross-border resolution. But he noted that it was also important for individual countries to then incorporate those principles.

"To its credit the FSB has done that. The issue going forward is going to be implementation on a national basis or on a regional basis," he said.