September 18, 2006
HP-117

Remarks by
Treasury Assistant Secretary for International Affairs
Clay Lowery
before the Institute of International Bankers
Breakfast Dialogue Singapore
Promoting a More Open Global Financial System

Promoting financial sector reform and liberalization throughout the globe is one of the Treasury Department's foremost objectives. I see three main benefits from reform and liberalization: increased growth, greater financial stability and better opportunities for foreign financial institutions to compete in local markets.

• Economic Growth: A World Bank study shows that countries with open financial services sectors grow, on average, one percentage point faster than others, with the incremental growth rates being even somewhat higher for developing countries.
• Financial Stability: A WTO study of 27 emerging market countries found that allowing foreign financial institutions to establish locally and engage in a broad spectrum of financial activities contributed to greater stability. A more developed and competitive financial system puts pressure on policy makers to make regulatory and supervisory structures more predictable and transparent and to follow sound macro policies, which are beneficial to economic growth and financial stability.
• U.S. Investment: Financial services represents one of the most dynamic sectors of our economy. Improving access helps our exporters to expand and develop new markets, building on U.S. competitive advantages. This investment also brings benefits to the foreign markets as our financial services companies provide fresh capital, enhanced risk management and a broader array of financial products.

Today, I want to describe three key methods by which Treasury engages on financial sector reform and liberalization. These include trade negotiations, technical assistance, and bilateral regulatory policy dialogues.

The first method involves formal negotiations, such as the World Trade Organization's Doha Round of negotiations on trade and financial services, and negotiations to establish Free Trade Agreements (FTAs) with individual foreign countries. The United States remains fully committed to restarting the Doha talks and achieving an ambitious outcome, but we cannot do it alone.

Treasury has a special responsibility for the financial service talks in the Doha Round. We are working with other countries to identify specific ways in which they could improve offers. Among the types of barriers we address in the WTO are limitations on new licenses, caps on foreign ownership of new or existing financial institutions, and measures that discriminate against foreign-owned financial institutions, such as those affecting the scope of business activities and geographic expansion of these institutions. At the moment, our efforts in financial services are stalled until the overall WTO negotiations are put back on track.

In 2000, the U.S. had comprehensive Free Trade Agreements with three countries, today we have implemented or concluded negotiations for 18 countries, including Singapore. The level of commitments we achieve in these agreements for services, including financial services, is high and provides our industries with greater opportunities and opens countries up to competition. For instance, right here in Singapore as of about a year ago, U.S. banks were able to obtain licenses for full service banks that were restricted prior to our FTA. These FTAs also provide protections for the transfer of capital associated with investments, so that emerging markets can attract funds to expand the productive potential of their economies.

A lesser- known area of engagement is the technical assistance Treasury provides in banking supervision, capital market development and debt management. Experts are hired from the private sector and we place them in central banks and finance ministries in countries around Africa, Asia, Eastern Europe, and the former Soviet Union.

One example of our engagement is the Broader Middle East Initiative and its Partnership for Financial Excellence. Through this program, we provide technical assistance in the development of respective financial sectors to countries in the Middle East and Northern Africa region, including through training by U.S. regulators and Treasury long- and short-term advisors.

In addition, Treasury – working with its counterparts – brings together finance ministries and financial regulators in a series of financial sector policy dialogues. We hold these dialogues with Australia, Canada-Mexico, China, the European Union, India and Japan. In support of these dialogues and our ongoing work on financial services liberalization, we routinely reach out to U.S. private sector financial officials and trade associations for their input and expertise. Let me touch on a few highlights.

China

Last October, we created the U.S.-China Financial Sector Working Group. It has met twice and another meeting will take place in the coming months. The Working Group brings together U.S. and Chinese financial regulators at a technical level for discussions about regulatory issues in the banking, securities, and insurance areas, as well as cross-sectoral issues such as regulatory transparency, capital requirements, and anti-money laundering policy. Because the talks are held at the technical level, the discussion tends to be detailed and frank. Our teams candidly discuss the health of our respective banking systems, including NPLs, risk management, branching and capital issues, payments systems, and the state of the equities and bond markets. We have also raised our agenda for opening up China's financial sector, especially lifting caps on foreign investment in the financial sector and taking additional measures to open up the securities and insurance sectors to foreign investment.

These discussions have anchored widespread exchanges and technical assistance between U.S. and Chinese financial experts. A great example is the FDIC's work in helping China understand the U.S. deposit insurance system.

At the end of this year, Chinese commitments in joining the World Trade Organization will take effect in the financial arena. We have stressed that China must deliver on all of its commitments, including provision of national treatment to foreign banks.

India

In the U.S.-Indian Financial and Economic Forum, Treasury officials and senior U.S. regulators engage in technical and policy dialogue with their Indian counterparts on banking, capital markets, insurance and AML/CFT.

Treasury officials stress the benefits of liberalization of financial institutions, markets, and cross-border capital flows in order to deepen financial intermediation and capital markets. Accelerating such measures would help India meet its goals of economic growth and poverty reduction, expanded access to financial services, and infrastructure development. Specifically, we have pressed them to lift investment caps in banking, insurance, and pensions; remove quotas on the number of foreign bank branches; and eliminate restrictions on foreign institutional investors.

In our meeting, both the U.S. and Indian side engaged in a constructive discussion of capital markets development noting that India needs a more active, more efficient corporate debt market to counterbalance the current undue dependence of Indian firms on bank financing for domestic investment. The SEC and CFTC discussed the U.S. corporate debt and commodities markets, as well as progress and developments in their regulation and oversight, both key areas of interest for India. Treasury officials also argued that eliminating caps on foreign investment in insurance and pensions sector, would enable institutional investors to help deepen India's capital markets.

European Union

The U.S. and EU are the world's two largest economies and their financial markets are closely linked. The EU is in the midst of a 10-year program to integrate its 25 member state financial markets into a single market. This will enhance the efficiency of Europe's financial sector, and help sustain higher European economic growth.

The U.S.-EU Financial Markets Regulatory Dialogue was born four years ago to address a wide range of financial and regulatory issues arising on both sides of the Atlantic. Initially we managed spillover effects from legislation and regulation arising in one another's market. We succeeded for example in mitigating such effects with the Financial Conglomerates Directive in Europe and the Sarbanes-Oxley Act in the U.S.

We also work together to anticipate other issues arising in the medium term which, if not addressed, could cause other spillover effects. A clear example is accounting equivalence. Right now, the SEC and EU are working on a roadmap that by 2009 would allow EU public companies to list in the U.S. markets using financial statements based on International Financial and Reporting Standards. The EU is also seeking to defer its finding on U.S. GAAP's equivalency to IFRS for listings in Europe until 2009 in order to allow continued listings by U.S. issuers. We have also discussed issues such as Basel II and re-insurance regulation.

Japan

Our long history of engagement with the Japanese government on financial sector issues has evolved from barriers to market access, to technical and regulatory issues. The Financial Services Working Group meets annually and is jointly chaired by Treasury and the Finance Ministry and FSA. Financial regulators from both countries participate in wide-ranging discussions of financial sector issues. Current issues include privatizing Japan Post's financial institutions so that there is a level playing field, strengthening market forces and competition in the consumer finance market, and improving regulatory transparency and predictability.

This has been a broad-brush presentation on Treasury's international engagement to promote liberalization and reform. But I hope you will take away that our work is wide-ranging and that it is one of Treasury's highest international priorities. Let me conclude by saying that the doors of the Treasury Department are open. We want to hear your views and concerns regarding financial services issues. Your input is critical to our work.