FROM THE OFFICE OF PUBLIC AFFAIRS

I am very pleased to join you this evening at the opening of the second annual symposium on Building the Financial System of the 21^st Century. My compliments to Hal Scott, head of the Program on International Financial Systems at Harvard Law School, and his colleagues for putting this event together, and to Citigroup for making this facility available.

This is my second tour of duty in Washington, the two stints punctuating about 20 years spent in the practice of law on Wall Street – and each time back inside the Beltway I have been struck by how rapidly the Fourth Estate begins to seem of transcendent importance. We all read the headlines, and sometimes they are unpleasant for policy-makers. And in the area of the US-European relationship, the headlines of late have not been great: “Europe opposes U.S. at the UN”, “US-EU relationship strained on trade issues”, “US and EU, again at loggerheads”. Well, my message for you tonight is altogether different. In the financial sphere, the US-European relationship is strong and cooperation is excellent. To make this point, I am going to spend a little time tonight reviewing US-European cooperation in three important areas: strengthening global growth, promoting a strong and integrated transatlantic capital market, and furthering our common efforts to fight the financing of terrorism.

Agenda for Growth

If you were to sum up this Administration’s economic policy in one word, it would be “growth”. Whether considering the industrialized countries, the emerging markets of Latin America or Asia, or the developing countries of Africa and elsewhere, economic growth is the principal means of addressing the quite different challenges each of these countries faces. And we have made this a theme of our engagement in each area. In developing countries we have stressed that private-sector-led growth, not aid from the official sector, will be the strongest and most durable means of ending poverty. In the emerging markets we have stressed that steps to promote stability—while important—cannot be allowed to stifle growth. And in the industrialized world we have stressed that each of the major economies must take the necessary steps – different for each of us – to get back on a path of strong GDP growth.

The US has been doing its part. Last week’s US economic data was unambiguously strong. Productivity growth remained exceptional, GDP growth far exceeded expectations, and the employment data showed that the economy is creating jobs.

Clearly, the U.S. economy is recovering. Other parts of the world are also growing – Canada, the United Kingdom, and Asia. But in continental Europe, growth remains weak, and on the whole the world relies too much on the United States as the engine for growth. Much of the focus over European growth is currently on macroeconomic tools. But perhaps more significantly, there is widespread and growing recognition among US and European officials that the acid test for boosting productivity lies with supply side policy changes, such as pension, labor market and tax policy reforms, and increasingly concrete actions are being taken to back up this recognition.

As you know, Germany is now moving forward with Agenda 2010, including labor market reform, and France—not to be outdone—is moving ahead with Agenda 2006, including ways to address the pension issue. The Berlusconi government is also putting forward pension and tax proposals. All of these efforts are consistent with the EU’s Lisbon Agenda, which in itself moves growth forward more than might once have been expected from the EU.

Less than two months ago, at the G-7 Ministerial in Dubai, all the G-7 Ministers and Central Bank Governors committed to an Agenda for Growth. Under this Agenda, the G7 will focus on “supply side” surveillance and they will benchmark progress in implementing structural reforms aimed at bolstering medium term growth. While we should not expect immediate and heroic progress, the Agenda for Growth shows that US and European officials are committed to working together to strengthen the world economy and in a way that we in the US, at least, think is focused on the right and most central topic.

US-EU Financial Markets Dialogue

Our common efforts to support global growth are a natural transition for a discussion of the US-EU financial markets dialogue, which is a key focus of this conference. Various studies have underscored that in a decade, an integrated and efficient European capital market could boost European growth by over one percentage point.

The agenda for this conference highlighted the term “greater disharmony of regulation”. I will admit that when I read this, I thought of the phrase from the great Persian Persian mystic Jalal ad-Din Rumi: “All of your anxiety is because of your desire for harmony: Seek disharmony. Then you will gain peace.” Yet, as aesthetically satisfying as it might have been for me to take that as my theme tonight, in the end I could not—for in my view we are not witnessing disharmony. To the contrary, we are witnessing meaningful and significant steps in Europe and the US toward regulatory convergence. Rather than there being a breach over financial issues, officials on both sides are working together to accommodate or resolve extra-territorial effects caused by law or regulation. The move toward global financial markets, and the positive implications that entails for saving, investment and growth, is continuing, and it is being substantially facilitated by cooperative management of the US-EU financial relationship.

Eighteen months ago, a technical team from the US -- consisting of the Treasury, the Fed, and the SEC -- met with the European Commission to begin the informal financial market dialogue. Since then, US and EU officials have met almost quarterly at either the senior working level or the policy level in Brussels and Washington. Financial regulators from both sides have actively participated, and rightly so since so many of the issues involved fall within their spheres of responsibility. The US and EU participants in the process see eye-to-eye on the purposes and objectives of the process. Both sides understand how fundamentally important this process is, and we are in 100% agreement on the agenda.

For our part, we have been interested in discussing with the Commission Europe’s Financial Services Action Plan (FSAP). This is a bold plan, consisting of 42 directives, regulations and other measures aimed at quickly building the legal and policy infrastructure for an integrated European capital market.

• As noted, the US has a profound interest in seeing faster growth in Europe and financial market liberalization and integration is one key component of this agenda.
• We are also interested in seeing the development of a robust transatlantic capital market that rewards competition and innovation, and that contributes to improving the allocation of global resources at lower cost to consumers.
• And needless to say, US financial institutions are globally based; they have major interests in Europe; we have an interest in seeing them be able to compete fairly throughout the world.

The United States strongly supports the Financial Services Action Plan. But, unsurprisingly, buried in the details of these 42 measures are many thorny issues.

The EU also cares deeply and understandably about financial market developments in the US. Though the start of the dialogue predated the Enron and WorldCom imbroglios, with the rapid progression of Sarbanes-Oxley Act, which sailed through Congress in July 2002, Europe had all the more reason to accelerate talks with us on corporate governance issues. I know that Commissioner Campos will touch on these issues tomorrow night. Both Europe and the United States are interested in other financial issues as well, such as the evolution of Basle II and clearing and settlement processes.

All of us in the US and EU who are party to the dialogue know that both sides have different legal, historical, and cultural traditions; that we are not identical; and that our actions have unintended “spillover” effects on each other. Recognizing this, our overarching goal in the Dialogue is to see through these differences, and to work together to achieve our common objectives in substance. That is why we meet often. We don’t negotiate, though – regulatory agencies such as the SEC, Fed and OTS are independent agencies, whose job is to protect a sound financial system at home. But we discuss, and we avoid public spats. We seek to identify issues coming down the pike; we discuss the implications of these issues for each other; and on the basis of improved understandings, we seek to iron out legitimate problems ex ante; and when such problems arise, we seek to work them out. We know that if this process is managed successfully, it is a win-win for the US, Europe and the world.

Let me tee up some key issues that we will undoubtedly delve into during the conference.

The EU’s top agenda item in the Dialogue has been the implementation of Sarbanes-Oxley, especially the implications of its provisions on auditor independence, loans to bank executives and directors, certification of financial statements by CEOs and CFOs, and standards related to audit committees. These issues were thoroughly discussed through the dialogue and a timelines document agreed to between the US and EU, as well as in SEC roundtables and other bilateral contacts. While the letter and spirit of Sarbanes-Oxley were fully observed, EU concerns were accommodated.

The EU is also closely following developments related to auditor registration under the Public Company Accounting Oversight Board – the PCAOB. Under the direction of PCAOB Chairman McDonough, one of our country’s foremost international financial statesmen, the PCAOB has launched bilateral talks with the EU to better understand and address ongoing EU concerns, and both sides are confident that the many difficult issues will be resolved.

EU officials have also raised the issue of the SEC allowing foreign trading screens in the US that would compete with US exchanges. This presents difficult and complex regulatory issues. The SEC staff continues to work through these issues.

On the US side, we are keenly interested in the Financial Conglomerates Directive, the Investment Services Directive and other directives and developments. Regarding the FCD, I want to note that because of a conflict, I have not been personally involved in dealing with this topic. So in the following remarks I will be describing Treasury’s position with the caveat that it is not one that I have personally been involved in formulating.

• The FCD requires that foreign supervisory regimes be “equivalent” for foreign-based firms to operate in the European financial market without costly legal and financial infrastructural changes. We, of course, believe that US supervision across the board is top flight. But Europe has focused on the prudential position of financial conglomerates at the “top” company level, whereas in the US, investment banks are supervised at the broker-dealer level. An equivalence finding is essential.
• Europe is putting forward an investment services directive. In many European countries, equities are only traded on exchanges. In the US, investment banks can “internalize” transactions and provide “price improvements” for larger customers, a practice that is also prevalent in the UK market. Again, the dialogue is about rewarding efficiency and innovation and respecting market practices.
• The nature of the process of European rule-making is also important. We want to see an open, transparent process in which there is healthy consultation with market participants. The markets are always a step ahead of the regulators; they know their business. Sound regulation is essential, but excessive regulation that stymies market innovation should be avoided. Regulators and markets need to work together to achieve the best outcome. I’m pleased to say that under the FSAP, consultation and transparency with markets have vastly improved.
• We would also like to see strengthened procedures for M&A activity through takeovers in Europe, which would benefit efficiency, the investment climate and European growth. Notions of reciprocity – allowing restrictions to investors from the US because our rules are different -- would go in the opposite direction. The data speak clearly -- different rules have not stifled vigorous M&A activity between US and EU firms.

To add to this already very full discussion plate, a large and overhanging issue is international work in the FASB and IASB to converge global accounting standards. Serious work is proceeding apace on this score, and this is a welcome and healthy development. Once there is one standard, accounting in the US and EU – if consistently applied, implemented, and enforced -- will be very similar, though not identical, exercises. In the meantime, difficult issues are raised. For example, under Europe’s transparency directive, all securities admitted to trading in European markets by 2005 will have to have to produce financial reports on the basis of IAS and there is no provision for grandfathering of existing securities. But US firms that are huge issuers in the Euromarkets use US GAAP. Will they no longer be able to tap the Euromarkets on this basis after the beginning of 2005? We will need to continue tackling this issue resolutely and expeditiously in the Dialogue. But we should not lose sight of the bigger picture -- surely convergence between the US and Europe will accelerate momentum toward an even more dynamic and enormous transatlantic capital market.

In the final analysis, the Dialogue aims to put in place a key piece of global financial market infrastructure for the 21^st century and a new pillar for stronger world growth. The potential benefits are enormous. It is important that the dialogue succeeds, and I believe it will.

US-EU Cooperation in Combating Terrorist Financing

Finally, let me say a few words about US-EU cooperation in the combating of terrorist financing. Since September 11th, the United States and the EU have campaigned jointly to publicly identify and designate terrorist entities and their financial backers, and freeze their assets. For example, nearly every terrorist individual and entity designated by the United States also has been designated by the EU or some of its member states. In a joint action in May 2002, the U.S. and EU simultaneously designated 18 terrorists and terrorist groups. Moreover, the United States and the EU have established a fluid, informal mechanism for sharing information on terrorists and their supporters.

Recent terrorist finance developments at the EU member-state level also are positive. Just this Monday, the Treasury Department designated 15 individuals in support of the Italian submission of these individuals, as terrorists linked to al Qaida, to the United Nations. In June, we joined Italy in designating 16 individuals associated with the Algerian based Armed Islamic Group. The same day, Treasury designated a member of the Hamburg, Germany, al Qaida cell that planned the September 11th attacks. With the support of the United States, Italy and Germany submitted these names to the United Nations. Last year, the U.S. and Italy also joined together last year in submitting to the UN the names of 25 individuals and entities linked to al Qaida. And in May of this year, the U.S. joined several European countries in designating the al-Aqsa International Foundation, a charity funding Hamas.

As for Hamas itself, we were very encouraged by the September decision of the EU Foreign Ministers to designate the group as a whole. Before this, the EU had only designated the military wing of HAMAS.

Despite these positive developments, particularly that on Hamas, there is room for improvement by the EU on both substantive and procedural issues. First, the submission and coordination of terrorist names for designation by the EU could be significantly accelerated. EU’s “Clearinghouse” process, which is the mechanism the EU has established to designate individuals and entities as terrorists or terrorist supporters, needs to be streamlined. The Clearinghouse’s unanimity requirement, its very high designation standard and its bureaucratic nature, combine to make the process too lengthy and cumbersome.

Second, the assets of "internal terrorists" are being left unblocked in a number of European countries. This is because under current EU treaty interpretation, the EU cannot direct member states to block the assets of individuals and entities of so-called "internal terrorists." We hope our European friends will close this loophole.

Our EU counterparts know that the United States is pressing for resolution on these critical issues, which we believe will enhance the EU's ability to combat terrorist financing more effectively. Still, the day-to-day cooperation between Europe and the US has been excellent and much has been achieved.

Conclusion

The US-EU efforts to strengthen global growth, to promote a transatlantic capital market through the informal financial markets dialogue, and to combat the financing of terrorism reflect our desire to achieve greater harmony and efficiency on both sides of the Atlantic. Good progress is being made on all fronts through cooperation and hard work, which will surely benefit the United States, Europe, and the world. That is why I believe the US-EU economic and financial relationship is strong and healthy and yet another reason why it’s important for everyone – particularly those of us in Washington – to remember that you can’t always believe what you read in the papers.