07 May 2009
Will Financial Crisis Bring U.S.-EU Regulatory Convergence?
Scope of differences, past experience point to challenges ahead
Washington — Similar regulatory approaches recently pursued by the United States and European Union (EU) to address the financial crisis present an opportunity for more harmony in regulation on the two sides of the Atlantic. But business executives should not count on it, experts say.
The trans-Atlantic partners, as members of the Group of 20 (G20) economies, have agreed on principles of financial stability and measures of regulatory cooperation. But despite the actions at a G20 summit in London April 2 promising increased oversight of financial services, erasing differences between U.S. and European regulatory systems will not be easy. (See “United States, Europeans Share a Convergence of Views.”)
“I hope there will be better coordination in monitoring international capital flows on both sides of the Atlantic,” said Joseph Quinlan, a fellow at the Center for Transatlantic Relations at Johns Hopkins University in Baltimore. “That’s something we can work together on once we create an [appropriate] framework.”
As thinking is changing — particularly in the United States, where policymakers are shifting away from the belief that markets can regulate themselves — U.S. and EU regulatory approaches become somewhat more similar.
But will European and American rules really mesh in the near future? Probably not, Quinlan said. “There is just too much sovereign interests involved,” he told America.gov.
Questions arise when global reforms are considered. Rym Ayadi, head of the financial institutions unit at the Brussels-based Centre of European Policy Studies, is uncertain about the effectiveness of any international financial regulatory framework that relies on national authorities to establish specific regulations and enforce them. For example, she said, the college of bank supervisors approved by the G20 would require an unconditional exchange of sensitive business information among different countries, something she doubts can happen.
“In the EU, they are struggling to have a European supervisor because national regulators in each jurisdiction insist on regulating its banking industry,” she told America.gov.
Ayadi said earlier experiences are not encouraging either. The 2004 Basel II banking accord on capital and risk management standards has been implemented differently in the United States than in the EU. As a result, when the crisis hit, European banks were undercapitalized to a greater extent than American ones.
TRANS-ATLANTIC DIALOGUE – WHISPERS AND CRIES
Despite many common market features, the U.S. and EU regulatory systems have tended to diverge due to different approaches to the market, political conditions and public values and attitudes. In general, Americans have favored the principle-based approach, which allows industries to set rules and police themselves and which usually entails accepting greater risk. Europeans have pursued mostly rule-based regulation, which imposes specific rules on businesses and tries to reduce the risk of industry entities that consistently behave or react poorly.
“Not only regulatory philosophies are different but also regulatory structures and approaches,” Ayadi said.
David Vogel, a professor of business ethics at the University of California, Berkeley, said that over the last 15 years EU health, safety and environmental regulations have been much more aggressive, comprehensive and risk-averse than those in the United States. “In those areas, I saw only increasing divergence,” he told America.gov.
But President Obama said on April 2 at a G20 meeting in London that he is committed to “forging a consensus.” He said that the last couple of decades resulted in “complacency about the dangers of markets going off the rails.” He said the current economic crisis “reminds us that we just have to put in some common-sense rules of the road, without throwing out the enormous benefits that globalization have brought.”
In general, trans-Atlantic regulatory differences on standards, testing and certification procedures; accounting and financial reporting; antitrust and competition procedures; and other matters add to the cost of doing business on both sides. This cost is estimated at 1 percent to 3 percent of U.S. gross domestic product annually by the Organisation for Economic Co-operation and Development.
In the mid-1990s, the two sides started a dialogue to mend the regulatory relationship. But the results of the dialogue are mixed, according to Raymond Ahearn of the Congressional Research Service. It has led to the completion of seven mutual-recognition agreements, under which businesses complying with the regulations of one jurisdiction are considered to be in compliance with the rules in another. But three agreements have never been implemented, and some issues have proved so contentious that they ended up before the World Trade Organization’s dispute-settlement panel.
The major divergences in regulatory policies are unlikely to disappear until the regulatory structures become more aligned, legislators on both sides get involved in the dialogue, and the push for convergence receives political support from the top, according to Ahearn.
The full text of his paper (PDF, 180 K) is available on the Web site of the Federation of American Scientists.
