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Speech: Why Global Markets Require Global Rules – and US-EU Cooperation
Commission Européenne - SPEECH/13/125 15/02/2013
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Member of the European Commission responsible for Internal Market and Services
Why Global Markets Require Global Rules – and US-EU Cooperation
Transatlantic Finance Initiative, New York
15 February 2013
Ladies and gentlemen,
When the financial crisis hit a few years ago, we had no choice. We needed a global reform effort. World leaders were quick to realise this.
The G20 agenda is a sweeping reform programme. It has guided and inspired reform efforts in Europe, the United States and many other places.
The G20 agenda is based on two fundamental principles:
First, we need new global rules for a global financial system.
Second, reforms will only work if they are implemented in a consistent way. The authorities that regulate and supervise the world of finance must co-ordinate their work. And they must co-operate when they enforce rules.
In other words: we must work together.
We all had three tasks:
One, to agree on a roadmap and international standards.
Two, to implement reforms at home.
And three, to make sure that our regulatory frameworks would work together.
These are pretty straightforward tasks.
And essential ones. Because if we fail in any of them, we fail in reforming the system, and in protecting ourselves from future crises.
Reforms simply cannot be half-implemented, or uncoordinated. This would simply translate into additional costs and renewed risks for the financial sector and for the economy.
And, on both sides of the Atlantic, we need to bring the financial system back to its primary function, namely to finance the economy.
Let me say a word on each of the three tasks which were at the core of my discussion with the FED Treasury and the Regulatory Agencies yesterday in Washington:
I – The international standards are largely agreed.
Recent – and welcome - progress was made on liquidity. We are on parallel tracks to implement Basel III.
We are close on margins for derivatives.
We are making good progress on shadow banking.
Work on systemic banks is also well in hand.
The real challenge now is how co-operation will work in practice.
II – The second task is implementation at home.
Let me say a few words on where we are in Europe.
We are completing our part of financial reform on G20. All the legislative proposals are on the table:
And we are creating a banking union. We are in the final stages of negotiations on a major reform of banking supervision. EU countries have already agreed to put the European Central Bank at the centre of this new system, and we hope to conclude negotiations with the European Parliament very soon.
I will spare you the details, but in essence, the euro area plus other Member States who wish to, will share a single supervisory system. In some ways, this new system will be similar to, and perhaps even simpler than, the US system of banking supervision, which involves many agencies.
And to this we will add proposals for a single resolution mechanism in the coming months.
These measures, together with creative action from the European Central Bank, and the recapitalisation exercise for EU banks strongly contribute to a more solid European banking sector.
And I think you will agree with me that we have made huge progress compared to one year ago. When the Eurozone was associated with doom and gloom. And when a banking union with a single supervisory mechanism would have sounded unrealistic and unthinkable.
I never shared this pessimism. It was based on a fundamental misunderstanding of the European Union. The EU, and the Eurozone, are much more than simple economic calculations. They reflect the fundamental desire of our countries to join together.
Yes, we still have weaknesses to address. But I am convinced that we are now better equipped to handle them with integrated supervision, new fiscal rules, and common backstops.
Because we are here in New York, let me also say a few words on how I think the US is tackling implementation.
The Dodd-Frank Act was adopted well over two years ago now. Independent regulators are facing the Herculean task of implementing it. Progress to date is impressive, even if timeframes have been missed, in large part because they turned out to be too ambitious.
On Basel III, I am often confronted with assertions that the US will not implement it, as it did not implement Basel II. I don't agree with this. My discussions with US regulators show that there is a clear determination on their part to fully implement Basel III. So I expect that the US will implement the agreement and will respect its G20 commitments. Entry into force may well take place in parallel with Europe, as we are both facing a complex process – which in my view is healthy democratic scrutiny.
But in other areas, there are some challenges. Let me mention three of these.
First, in the banking area.
Do we need additional measures on top of Basel III?
Large international banks pose potential problems. However I am not fully convinced by the proposed approach on Foreign Banking Organisation. It seems to me to be moving away from cooperation with international partners – a cooperation which I see as absolutely necessary.
We need to work together with the FED on a proportionate and cooperative approach.
Second, on derivatives, the most mobile part of the financial system.
We seized the unique opportunity to agree on common international rules. Rules in the US and the EU are very similar. But the framework can only operate in practice if we are prepared to rely on each other.
Expanding interpretation of home-grown rules to transactions that are already covered by equally solid foreign rules will only lead to legal conflicts. It will create uncertainty, increase costs and push trade to less well regulated places. This is precisely what we want to avoid.
Third, I continue to be disappointed by the slowness of the US in moving towards internationally agreed accounting standards.
I know this requires time. And I also know that the US Business Community is still to be convinced. But it is essential to have common basic standards. Otherwise, we risk that our prudential standards will have different effects.
Let's face it: we risk to return to a fragmented system based on national or regional approaches.
III – This leads me to the third task: setting up a cooperation mechanism to make sure that regulatory frameworks work together.
We must put in place mechanisms that ensure that we can rely on each other’s supervision. And that we can work together to prevent bank crises, or to manage them.
We must put in place clear rules that show the market which rules apply, and when.
And we must put in place procedures that help us enforce our rules.
The EU and the US are at a crossroads.
If we choose to part ways, this will send the wrong signal to markets and to the rest of the world. It would increase the cost of capital, and reduce growth prospects.
If we can work together and cooperate, we can continue to provide a common base for international finance, boosting growth and employment.
We have a unique opportunity to show that we choose cooperation over disunity.
I strongly encourage our US friends to fully engage with Europe, to show the necessary political will in favour of a wide and comprehensive economic agreement. This should certainly include trade negotiations.
This should also provide the framework for regulators and supervisors to work on regulatory convergence, reliance and prudential cooperation.
This is the reason why I have come to the US. To express my conviction that, if we push our co-operation further, we can move together towards a truly transatlantic financial alliance.
For me, a transatlantic financial alliance means that we adapt our regulatory and supervisory co-operation to the reality of the transatlantic market place.
Financial firms in the EU and in the US face very few economic barriers in transacting across the Atlantic.
But they and regulators face many regulatory and supervisory differences. These differences are unnecessary, costly and ultimately undermine efficient control and supervision.
A transatlantic financial market place requires a transatlantic regulatory alliance that is based on mutual trust, co-operation and full reliance between our respective authorities.
From my side, I am willing to invest time and effort in pursuing these objectives. President Obama and European leaders have just agreed to launch negotiations on a comprehensive trade and investment partnership to promote fair and free exchanges across the Atlantic. The two words fair and free, used by President Obama in his State of the Union's address are equally important.
They will also guide our work to promote this transatlantic Regulatory alliance.
And I am convinced that if we succeed, it will be a catalyst for trade and growth between us.