WASHINGTON — A top financial analyst is calling for the U.S. Trade Representative to work with the banking agencies to help establish an international framework for financial regulation.

In a paper released Tuesday, Karen Shaw Petrou, managing director of Federal Financial Analytics, warns that regulators in multiple countries are in danger of adopting protectionist regimes due to a widespread fear that their foreign counterparts are not doing enough to prevent another financial crisis. Without intervention, she says, the dream of a so-called global framework for financial institutions is likely to die quickly.

"Given that the reality, not the hope, is a breakdown in the global framework, countries are now drawing up the barricades," Petrou says.

In an attempt to prevent that from occurring, Petrou says the USTR can help salvage the situation as it negotiates a new international trade-in-services accord with 20 trading partners. As part of the agreement, she said the USTR should work with the Financial Stability Oversight Council to establish standards for trade-in financial services. (Trade-in-services refers to the sale of an intangible product between a company and a customer.)

Such an approach would require a radical rethinking by the USTR, which typically focuses on trade in terms of market impediments, rather than on how products and services come into the United States, Petrou says. But she said it's critical the USTR act.

"How do you match a desirable goal of eliminating protectionism in trade in financial services with a very reasonable objective of the Fed to have prudent financial services?" she asked.

At issue is a growing divide between international and U.S. regulators over how best to protect the financial system.

The Basel III international accord detailing new capital and liquidity rules has already been indefinitely delayed in the U.S. (and elsewhere) and many are concerned the agreement will not be applied harmoniously.

But arguably the biggest sign that a global agreement on financial services is slipping away is the Federal Reserve Board's December proposal that would significantly change how it supervises foreign banking organizations in the U.S.

In the past, regulators have mostly relied on a banking company's home regulator to oversee the institutions, but the financial crisis has eroded the U.S. regulators' confidence in some of their foreign counterparts. The Fed plan is designed to subject foreign banks to the same rules that U.S. banks must comply with.

"It's our way or the highway," Petrou says of the Fed plan. "You have to play by our rules, because we don't trust your home country regulator. We do not trust your home country regulatory system a) to ensure that you as an entirety or here in the United States can withstand stress or b) if your U.S. operations come under stress, your home country will permit the parent to support you."

Petrou says the Fed has a point, considering that flaws that were revealed during the financial crisis and the reluctance of some nations in Europe to adopt regulatory reform.

"I don't blame them. They were shocked by what happened in 2008 to 2009," Petrou said. "They've also been frustrated," even if they would never say so publicly. Instead, U.S. regulators have described it as "the slow pace of implementation in the Eurozone. It scares them and it should."

The problem, she says, is that the U.S. and others are effectively building a moat around their individual banking systems, encouraging more countries to adopt isolationist and protectionist policies — adding to overall systemic risk.

The Fed proposal is only one example of such barricades that are cropping up.

There are several pending proposals that may also provide similar obstacles to banking in the U.S. and would limit the most favorable liquidity treatment only to U.S. obligations, while discriminating against other foreign sovereigns. For example, she cites proposals like the Volcker Rule and the Commodity Futures Trading Commission's extraterritorial application of U.S. rules.

"Combined, all of the U.S. proposals are not only emboldening other nations to wall off their own banking system, but also leading to increased threat of retaliation against U.S. banking organizations," Petrou warns in her paper.

But a USTR agreement could establish a framework for "mutual recognition, 'passporting' and other criteria to protect cross-border finance without the protectionism," Petrou writes.

Little work has been done in this area thus far, and it will be a difficult task determining what policies are designed to protect the system versus those that are designed to protect American banks.

The Federal Reserve Bank of New York has already spent some time on the issue, and specified a number of appropriate financial "protections," including changes to the U.K.'s plan to ring-fence retail from investment banking, Germany's supervision of cross-border banks to ensure adequate liquidity under stress, along with the Fed's foreign bank proposal.

But Petrou disagrees that, at least in the case of the U.S., those rules serve just as protections. That's why Petrou says an organization like the Financial Stability Board under the auspices of the Group of 20 nations can help develop a road map to differentiating prudence from protectionism.

"Whether or not it's warranted, the Fed's [foreign bank] rule is protectionist," said Petrou. "It creates trapped capital and liquidity pools in the United States. Is it necessary because the other stuff isn't working? That's the really critical issue. It might be, but it's a bad solution. So here's a better one — negotiating a framework for free, fair and prudent trade in financial services."

In some respects, the Fed in its foreign bank proposal tried to strike a balance by suggesting that if a home country meets liquidity rules under Basel III, then the Fed would impose one approach, while if it didn't, it would impose another. But Petrou expects that numerous stakeholders will try to fight the Fed's approach by insisting that Basel III will work — an argument she resoundingly rejects.

"I think a lot of people are going to put into their comment letters, 'Give the global framework a chance. It will work,' " she said. "You can hope against hope, but the global financial regulatory framework is only salvaged, if at all, through face saving agreements that in fact permit wide, wide variations in the actual rules."

It's one of the reasons she says she chose to write the paper to step away from the argument, 'Say it ain't so.' Instead, she calls on regulators to "build out the best possible optimal, not maximum solution to prevent that race toward protectionism."

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