Summary of the breakout conversation “Atlantic Divide: The Danger of Financial Divergence” at the 2010 Annual Members’ Conference.
Paula Dobriansky, Former Under Secretary of State for Global Affairs
Douglas Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy, The Brookings Institution
Brian C.McK. Henderson, Senior Advisor, Espirito Santo Financial Group, SA
Frank Kelly, Managing Director & Head, Government Affairs, Deutsche Bank Americas
Angel Ubide, Director of Global Economics, Tudor Investment Corporation; Member, Atlantic Council Global Growth Task Force
Moderated by Alexei Monsarrat, Director, Program on Global Business and Economics, Atlantic Council
It is crucial that the E.U. and the U.S. provide leadership in defining the blueprint for global financial regulation. A coordinated transatlantic approach to regulation would create a framework that would benefit the global economy in the long run; however, governments will have to make hard choices in the short run to ensure the approach is effective. During the course of the debate, certain issues that continually surfaced were regulatory arbitrage, loss of trust in institutions and government, bank capitalization and emerging markets.
Regulatory arbitrage is a threat to overregulated countries and markets because businesses and financial institutions will move to areas with a more favorable regulatory environment. When the Sarbanes-Oxley Act was enacted in 2002, foreign listed companies moved off U.S. listings to avoid the reporting costs and burdens imposed by the legislation. There are elements of the Dodd-Frank bill that may have the same effect. The creation of an international regulatory body would help create a system that would provide consistency and uniformity in global financial regulation. Many perceive the G-20 to be ineffective in coordinating this effort due to multiple diverging interests of the member governments.
Europe has recently experienced a surge in nationalistic attitudes due to conflicting interests on regulation; not all countries want a single standard in regulation. These discrepancies have fueled the already existing frustration that arose from the crisis, increasing public distrust in governments and financial institutions. Markets outside Europe and the U.S. are growing relatively more powerful – including a surge in activity in the M&A market in emerging economies — and will challenge E.U.-U.S. economic leadership in the international arena. These rising economic powers do not believe they should be held accountable for a crisis that originated in the U.S.; thus they have not bought into the idea that a coordinated approach to regulation is in their interest.
One of the most damaging elements of the process to date is the mixed messages that the political debate is sending to the banks. Certain individuals believe U.S. banks are undercapitalized and should have higher capital reserve ratios. On the other hand, politicians are telling banks to lend more to stimulate the economy. This contradiction is hindering bankers from making lending decisions. Bank lending has become a liability because of the bureaucratic process entailed in the paperwork bankers must complete when providing a loan.
In essence, the current financial system has enabled process to take precedence over purpose. This constriction has devastating effects to the economy because bank lending is a major source of credit for businesses. Thus, there is a balance that must be achieved between limiting risky behavior and credit availability.
-Summary by Eduardo Espirito Santo, Intern, Global Business & Economics Program
This session was held under Atlantic Council Rules, defined by President and CEO Frederick Kempe as “Chatham House Rules with military enforcement.”