FROM THE OFFICE OF PUBLIC AFFAIRS

"The US-EU Financial Market Dialogue:
The Transatlantic Dimension"

It is an honor to address the "Second Annual European Financial Services Conference." I thank the conference organizers for putting this event together and for recognizing that Europe's momentum on financial markets is extremely important to the United States.

The United States has strongly supported European integration for many decades. The United States and the European Union are the two largest economies in the world and share a special responsibility for promoting the sound management of the global economy. The policies pursued in the United States and Europe are critical not only for the citizens of each area, but also for the world at large.

A central aim of US foreign economic policy is to help promote strong global growth. The United States has been doing its part, and continues to do so. Other parts of the world are also growing. But in many key industrial countries, weaknesses persist, and the world has relied too long on the United States as a single motor.

Last September, the G-7 Finance Ministers committed to an Agenda for Growth. Under this Agenda, the G-7 will focus on "supply side" surveillance, benchmarking progress in implementing reforms to boost productivity in such areas as labor markets, pensions, and tax systems. To be sure, concrete actions are underway on these fronts. But further reforms are needed to create the flexibility for bolstering growth in and across our countries. The need for increased global growth will be a key discussion topic among G7 Finance Ministers this year.

US history teaches us that the creation of efficient and robust capital markets is critical for strong growth. The openness of the US financial system, its depth and liquidity, and fierce competition have been one of the most potent disciplinary forces for enhancing competitiveness, strengthening consumer choice and welfare, and offering borrowers capital at costs better suited to promoting investment.

Various studies have shown that Europe's Financial Services Action Program (the FSAP) has the potential to raise European growth by one percentage point per annum in a decade. Were this potential to be achieved, the FSAP -- building on the euro's successful launch, let alone other structural reforms -- could represent a lasting accomplishment for Europe and a win-win opportunity for Europe, the United States and the world.

The world is living through a period of rapid globalization in which financial markets are a key driver. The FSAP is not just about creating a unified European financial market. It is about anchoring the European market in an integrated, state-of-the-art and open global financial marketplace. Needless to say, US financial institutions are leaders of the global financial industry and we have a strong interest in seeing that US firms are able to compete globally on fair terms, allowing their competitive and innovative energies to flow.

Indeed, US firms are a large, longstanding and dynamic part of the European financial market, and the Euromarkets in particular. They can help the evolution of the European market. For example, US financial institutions are leaders in mutual fund products, critical to the development of US pension plans. Most analysts cite the evolution of defined contribution systems as one of the keys for addressing European demographic challenges.

As the FSAP process moves forward, the United States also recognizes that the process of building a global financial market is a two-way street. European firms are understandably interested in access to US capital markets.

Also, Europe and the United States have different financial legal, historical and cultural traditions; we are not identical; and our actions may have "spillover" effects into the other's jurisdiction. I am reminded every day of this as outside my office in the Treasury hallway hangs a picture of former Secretary Carter Glass, one of the co-authors of the Glass-Steagall Act, who obviously was not a proponent of universal banking.

In achieving our common objectives, US and European authorities will face new challenges, particularly in balancing competitive efficiencies with sound regulation.
Sound regulation is essential for investor protection and confidence. But the financial industry is always a step ahead of the regulators, and all would be ill served if regulation stifled innovation. Thus, regulators and supervisors should consult closely with financial institutions, understand how firms operate, and take their perspectives into account. To do so, regulations should be made in a transparent manner, open to public comment.

For these reasons, the US and EU have a strong interest in closely cooperating on financial markets. Almost two years ago, technical teams from both sides began meeting informally in the US-EU informal financial market dialogue. On the US side, technical officials consist of representatives from the US Treasury, the SEC, and the Federal Reserve. The Commission represents Europe. Since then, we have met roughly every four months. This dialogue was cited by President Bush and President Prodi at their Summit as a strong example of US-EU cooperation. In addition, the dialogue is supplemented by high-level policy meetings; the SEC is developing a regulatory dialogue with CESR; and PCAOB representatives have forged strong ties with Brussels.

The US Treasury has a broad interest in financial market issues. Regulatory agencies such as the SEC, Fed, OTS and PCAOB are independent and it is their job to protect a sound financial system at home. Thus, in the dialogue, we discuss issues that are emerging and the implications of these issues for each other; we seek to iron out legitimate issues; and when problems arise, we seek to work them out. In short, we manage "spillovers". How are we doing? How does the US see the dialogue?

The United States strongly welcomes the FSAP. We know that the FSAP timetable is ambitious. But even if there are slippages, setting ambitious deadlines and working on a fast track can be a virtue.

We are pleased by the more transparent European processes for rule-making that have developed in the last two years and the increased consultations with market participants. Our sense is that Brussels and the European Parliament now appreciate that working with market participants can improve European rule-making, create buy-in for proposed regulations, and strengthen European financial markets.

We are also watching many individual FSAP measures and other looming issues. The Financial Conglomerates Directive has attracted considerable attention. It requires that foreign supervisory regimes be deemed "equivalent" by Europe for foreign-based firms to operate in Europe without costly legal and financial changes that could hurt the European market. We, of course, believe that the US system of supervision is top flight, world class and sound. But to help Europe reach a finding of equivalence, our regulators have worked closely with European regulators to deepen understanding of US practices. These discussions over two years have included a full explanation of the system of US regulation of investment banks, as well as Federal Reserve and OTS supervision. They have also led the SEC to issue a rule proposal formalizing the SEC's supervision of broker-dealers on a consolidated group-wide basis. A formal equivalence finding may be several months off, but the FCD is to be transposed into national laws by August 2004 and take effect in 2005. Time is short. Europe should dispel uncertainty and move rapidly to find equivalence.

The Council of Ministers has recently agreed upon an Investment Services Directive and the European Parliament is now following up. The directive could have profound implications for the liquidity of equity trading in Europe. The US has one of the most efficient equity markets in the world, and one in which "internalization" of transactions allowing for "price improvements" for larger customers has long been practiced, consistent with the principle of transparency. In managing spillovers through the dialogue, both Europe and the United States have emphasized the need to achieve our common objectives in substance -- the dialogue is about rewarding innovation and allowing regulation to support different market practices in a neutral manner. How internalization is permitted in the European context is extremely important for the future vibrance of European financial markets.

Europe is also moving forward with a Takeover Directive after many years of internal discussion. An integrated economic space for M&A activity throughout the Union which transcends national borders would represent forward movement for the integration of EU capital markets, further strengthen the competitiveness of Europe and the world economy and contribute vitally to the achievement of the FSAP's lofty growth objectives.

Large direct investment flows between the United States and Europe have taken place for centuries -- think of the building of our canals and railroads. This is an important achievement that has benefited our economies. The stock of European FDI in the US, at historic cost, is over $860 billion and some 64% of all FDI in the US; the US stock of FDI in Europe is over $700 billion and 46% of the stock of total US FDI. In recent years, we have witnessed eye-popping takeovers: Daimler has taken over Chrysler; Deutsche Bank has taken over Banker's Trust and Alec Brown; British Telcom bought Yellow Book USA; and Unilever bought Best Foods. As we in the United States sift through the complex legal provisions of the Takeover Directive, we believe it is essential that there be a clear statement that notions of reciprocity vis-à-vis third countries be avoided. Otherwise, there is risk of generating unnecessary uncertainty for potential investors in Europe, which would prove economically deleterious.

For decades, US firms have listed securities on the Euromarkets on the basis of US GAAP. But the implication of the Transparency and Prospectus Directives is that for all securities admitted to trading in European markets by 2005, the issuing firms will have to produce financial reports on the basis of IAS. Further, the Transparency Directive does not effectively provide for grandfathering of existing securities. US firms and institutions remain huge issuers in the Euromarkets. We understand that Europe is now looking at these issues and considering whether USGAAP should be found "equivalent" or "comparable" for the purposes of the Directives. In the meantime, third party issuers are facing a period of tremendous uncertainty. Already, some are reportedly pulling back from the Euromarkets. Clearly, were this business to diminish, the Euromarkets would be smaller and less liquid, and the cost of raising capital for those firms continuing to use the Euromarkets higher. Such an outcome would be inconsistent with the noble objectives and growth ambitions of the FSAP. This issue should be tackled resolutely and expeditiously.

Over the medium term, we also recognize that the FSAP faces many more challenges and that the European Commission and the member state Financial Services Committee are looking to the future. The presence of national clearing and settlement systems means that European cross-border transactions can cost 5 to 15 times higher than national costs. Reducing these costs would surely benefit European consumer welfare enormously. So would a reduction in impediments to cross-border pension fund activities. Corporate governance, enforcement and cross-border retail issues will also be important priorities.

Tackling all of these issues, dispelling uncertainty and creating a liberal and integrated cross-border European space for financial markets will be critical if the true promise of the FSAP is to be secured. We wish Europe the best in achieving these justifiably lofty and ambitious goals and we will be monitoring implementation closely.

In the wake of Sarbanes-Oxley, the SEC thoroughly discussed with European officials such issues as auditor independence, loans to bank executives and directors, certification of financial statements by CEOs and CFOs, and standards related to audit committees. While the letter and spirit of Sarbanes-Oxley were fully observed, EU concerns were accommodated. Notwithstanding some hiccoughs following the advent of the Public Company Accounting Oversight Board (PCAOB), the PCAOB launched bilateral talks with Europe and a healthy dialogue is underway.

Adding to this agenda, the FASB and IASB are working to converge global accounting standards. US officials are mindful of the bigger picture. Converged accounting standards -- each consistently applied, implemented and enforced -- would make accounting in the US and Europe a similar exercise, accelerating momentum toward an even more dynamic transatlantic capital market. Recent events on both sides of the Atlantic have underscored that neither of us is infallible and that the issue is not whether GAAP or IAS is better or worse -- rather, the issue is how to find the right balance between rules and principles underlying these standards, how to ensure effective implementation of accounting standards, and how to best strengthen investor confidence.

On our side, the United States intends to continue its close cooperative relations with Europe for the good of the transatlantic financial market, for the good of US-European relations, and for the good of the global economy. In doing so, we intend to buttress our close ties with the Commission, to build further bridges to the European Parliament and to strengthen our outreach with the private sector and member states.

In the final analysis, the US-EU financial market dialogue and regulatory cooperation will be constructing a pillar of the international financial architecture of the 21st century. Progress is being made, but many challenges lie ahead. The United States will remain engaged.