U.S. bankers and insurers are trying to use trade deals, which can trump existing legislation, to weaken parts of the Dodd-Frank Act designed to prevent a repeat of the 2008 financial crisis.
While the companies say they are seeking agreements that preserve strong regulations and encourage economic growth, their effort is drawing fire from groups who argue that Wall Street wants to make the trade negotiations a new front in its three-year campaign to stop or alter the law.
Senator Elizabeth Warren, a Massachusetts Democrat who sits on the Banking Committee, said in a May 7 statement that there are “growing murmurs” about Wall Street’s efforts to “do quietly through trade agreements what they can’t get done in public view with the lights on and people watching.”
The U.S. has embarked on three major negotiations aimed at reducing barriers to international commerce, one with the European Union covering most types of trade and investment, and a similar one with Asia-Pacific nations including Japan. A third set of talks, covering only services, is under way at the World Trade Organization.
The Coalition of Service Industries, a trade association whose website lists Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), American International Group Inc. (AIG) and The Chubb Corp. (CB) as members, told the Office of the U.S. Trade Representative in a May 10 letter that “more compatible regulations for services” should be part of the EU deal.
“Such provisions can be accomplished without prejudice to regulators’ authority to adopt or maintain regulations for consumer protection, environmental, health, safety, or prudential reasons,” the coalition’s president, Peter Allgeier, wrote in the letter.
The Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, said in a March 1 letter that liberalization of trade in financial services “is often incorrectly equated with deregulation.”
Stephen Pastrick, director for public policy and advocacy at the group, wrote that it supports “strong regulation and prudential standards. However, there is much to be gained” by an agreement “enhancing regulatory efficiency.”
A group of House Republicans yesterday wrote to President Barack Obama calling on him to “reduce regulatory discrepancies” between the U.S. and EU. They cited financial services as “one of the greatest opportunities” for change.
“Multiple and often conflicting post-crisis policy initiatives have made the regulatory landscape difficult for financial services firms to navigate,” they wrote in the May 22 letter. “Confusion caused by inconsistent and conflicting regulations, has already spilled over into the broader economy.”
In the U.S., the president starts negotiations on trade agreements with a general mandate from Congress. After they are signed, the agreements are converted into implementing legislation, which can change regulations if the deal requires.
Congress then votes on the proposal, usually under special procedures that bar amendments to the pact’s details.
“The trade talks could easily become a Trojan Horse,” said Marcus Stanley, the policy director for Americans for Financial Reform, a group that includes labor unions, civil rights organizations and consumer advocates.
In separate letters on the EU and Asia-Pacific pacts, the industry coalition said negotiators should draft rules limiting what regulators can do in the name of protecting financial stability. The letters also urged using the pacts to curb extra-territorial rules that can reach beyond U.S. borders, like ones currently being considered on financial derivatives.
None of the letters specifically mention a desire to change the Dodd-Frank law, the 2010 overhaul of U.S. financial regulation. The law does, however, address many of the issues raised in the letters on the trade agreements.
The coalition called for the U.S.-EU agreement to avoid rules that reach across national boundaries and have an “extra-territorial effect.” Allgeier said that suggestion was motivated in part by a fight over regulation of the cross-border swaps market under Dodd-Frank.
The 27-nation EU hopes to complete talks on a broad agreement on investment and trade in goods and services with the U.S. within two years, EU Trade Commissioner Karel De Gucht said on Feb. 13.
The U.S. announced plans to join a WTO negotiation on trade in services, in areas including finance, logistics and telecommunications, on Jan. 15. Asia-Pacific nations including the U.S. and Japan are also working on a deal for that region, the Trans-Pacific Partnership.
Bloomberg LP, the parent company of Bloomberg News, wrote a Feb. 26 letter to the Office of the U.S. Trade Representative supporting the WTO agreement because it would improve the market for financial services information.
Trade policy grew more controversial in the 1990s as pacts such as the North American Free Trade Agreement and WTO deals addressed domestic rules -- rather than only tariffs applied at borders -- as potential barriers to commerce. Services, in particular, face domestic regulations because companies usually need to be physically present to provide them.
The financial services industry has already invoked international trade rules in its bid to weaken proposed regulations, notably the Volcker rule that would ban proprietary trading. Named after former Federal Reserve chairman Paul Volcker, the rule is a signature part of Dodd-Frank.
The U.S. Chamber of Commerce sought a review of the rule by U.S. trade authorities, arguing it violated existing agreements.
In a Feb. 26 letter on the WTO negotiation, Allgeier said that the blanket exemptions for so-called prudential regulations, aimed at ensuring the safety and soundness of the banking system, should face some limits.
For example, domestic prudential regulators shouldn’t be able to discriminate against foreign companies, and should act in a manner that is “least trade and investment distorting,” Allgeier wrote. Also, capital requirements in financial services should not be used as “disguised barriers to entry or competition with domestic suppliers.”
The complaint about capital standards echoes Jamie Dimon, the chief executive officer of JPMorgan, in 2011. Dimon criticized capital standards created by the Basel Committee on Banking Supervision as “anti-American” over their additional penalties on large banks and liquidity rules.
Allgeier said in an interview that the request was motivated by limits on U.S. companies in other countries made in the name of safety and soundness. To have a successful international negotiation, the U.S. regulators such as the Federal Reserve need to be flexible on what it’s willing to do so that other countries will agree, he said.
“We need to find the right balance,” Allgeier said. The prudential regulators are going to start with the most conservative position, so can you move them to a degree that meets their objectives?’’
Sifma, the Wall Street lobby, also said the EU agreement should cover “existing and future financial services laws and regulations that have significant transatlantic trade effects, significant extraterritorial effects, or both” in a May 14 letter.
Top officials from the EU, Britain, France, Germany, Switzerland, South Africa, Russia, Brazil and Japan have called for changes to guidance proposed by the Commodity Futures Trading Commission. The guidance, which the U.S. industry has opposed as well, would cover transactions involving overseas offices of U.S. banks and hedge funds incorporated offshore.
A separate set of regulations, proposed by the Securities and Exchange Commission, would cover some types of swaps. That set has garnered more support from the industry.
Neither set of rules has been completed.
Mac Destler, a professor at the University of Maryland who studies the politics of trade policy, said negotiators could opt to include provisions in the trade agreement that do less than simply reverse existing regulation. For example, they could include deals to consult in the future where rules on finance conflict, or declare that current regulations are grandfathered into a trade pact.
“If you say you’re going to have a full-out big agreement, it’s pretty hard to say you’re going to carve out the regulatory regime entirely,” Destler said in an interview. “The harder question is how far you go.”
Philipp Roesler, the vice chancellor of Germany, said today during an appearance in Washington that the financial services industry would be the “greatest challenge” for the U.S.-EU negotiation.
The number of rules to be addressed in the wake of the 2008 crisis and differences in regulatory approach in the EU and U.S. may make it harder to reach accords on financial rules than on areas areas of traditional friction between the two sides, such as agriculture, he said.
“We have very different systems,” Roesler, who is also the economics and technology minister, said in remarks at the Brookings Institution. “We have much to do, a great challenge.”
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