When European Union financial-services commissioner Michel Barnier wrote a letter to U.S. Treasury Secretary Timothy F. Geithner on the complex topic of hedge-fund regulation, he used a little trick he learned from Olympic skiing champion Jean-Claude Killy: keep it short.
Barnier, 59, who wrote just 16 sentences in his message to Geithner, was in charge of the 1992 Olympic Winter Games in Albertville and worked with Killy before French President Nicolas Sarkozy arranged for the former foreign and agriculture minister to be put in charge of drafting Europe’s biggest overhaul of financial rules since the 27-nation bloc’s creation.
“I told Michel that letters should be no longer than one page,” said Killy, who won three gold medals for skiing in the 1968 Olympics and worked in the same office with Barnier on the French games.
The global financial crisis sparked a public and government call for more regulation of financial firms after costing the EU $5 trillion in bank bailouts and loan guarantees. In a U.S. visit that begins May 9, Barnier is meeting with Geithner, Federal Reserve Chairman Ben Bernanke, bank executives and politicians to try to harmonize the differing approaches of the EU and the U.S. on preventing another disaster.
The U.S. and Europe have slowly diverged on regulation policy for banks, hedge funds and capital requirements since the leaders of the Group of 20 nations last year called for a unified stance in response to the global financial crisis.
European banks say capital rules will hit them harder than their U.S. counterparts because they have proportionately bigger loan books. EU rules may lead to a 6 percent drop in Europe’s gross domestic product over the next five years as banks lend less, according to a study from the French Banking Federation.
“We can’t take the risk of another crisis happening without having learned lessons from the previous one,” Barnier said in an interview in his Brussels office before the trip. “The taxpayers no longer have the means, and the citizens will not forgive us. It would be absolutely disastrous from a political point of view.”
Unlike the U.S., the European Union hasn’t proposed measures to regulate bank size. President Barack Obama proposed a law in January recommended by former Federal Reserve Chairman Paul A. Volcker that would bar banks from investing in hedge funds and cap some deposits to reduce risks.
“The U.S. has proposed the Volcker Rule and is now in the lead,” said Karel Lannoo, chief executive officer at the Centre for European Policy Studies in Brussels. “Barnier will have to carry with him the message that the EU is fully committed to reform.”
Geithner wrote to Barnier in March seeking assurances that EU hedge-fund laws wouldn’t stop U.S. funds marketing to European investors. Barnier wrote back, saying the U.S. has nothing to fear as long as hedge funds subscribe to “high levels of transparency and security,” according to a copy of the March 29 letter.
Barnier needs a more positive response from the U.S. than he had in London, Europe’s largest financial center. When Barnier visited there in March and April, he was received “with immense suspicion,” said David Buik, a market analyst at inter-dealer broker BGC Partners in London. Sarkozy called the U.K. “the big loser” when Barnier was nominated to the EU post.
U.K. executives are tracking the proposed EU hedge fund rules, which would impose restrictions on managers’ pay and use of debt in investments. The U.K. financial regulator estimated the rules would cost at least 4.6 billion pounds ($6.75 billion) to implement.
‘Show Him the Door’
Barnier’s “clearly a very intelligent man, but the trouble is that the U.K. has so much more to lose than any other financial center,” Buik said. “People who believe you can agree on global financial regulation are deluded. I hope Geithner and the others show him the door.”
“The interesting question that the U.S. might ask is ‘who does Barnier speak for?” said Simon Gleeson, a regulatory specialist at Clifford Chance LLP, a London-based law firm. “Is it the majority of the European community?”
While Barnier will defend the EU’s hedge-fund rules, he may be on the attack when it comes to capital requirements.
Barnier plans to propose rules at the end of the year requiring banks to hold higher-quality capital. The EU requirements will enforce proposals under discussion by the Basel Committee for Banking Supervision, which sets minimum standards for banks in 27 countries, including the U.S. and EU.
Can’t Act Alone
“Neither the Americans by themselves or the Europeans by themselves can confront the challenges that face the world,” Barnier said. “On the issue of capital requirements, I want to know what the Americans are doing and what they’re planning to do.”
European bank executives argue the tougher rules, which call for them to keep more capital against over-the-counter derivatives, would put them at a disadvantage compared with U.S. banks. The U.S. never fully implemented the last set of Basel capital rules from 2004.
“The United States continues to influence the Basel process but, in effect, treats the guidelines as optional,” Deutsche Bank AG’s head of government and regulatory affairs Andrew Procter wrote to regulators last month. “Deutsche Bank believes that no other Basel Committee members should move ahead with implementation until there is a clear timetable from the U.S.”
Barnier is also under pressure from European leaders, including German Chancellor Angela Merkel and Sarkozy, to rein in credit-rating companies in the wake of the Greek debt crisis.
Scrutiny of credit-ratings companies intensified after Greece’s rating was cut last week to junk status by Standard & Poor’s. The downgrade added urgency to European plans to bail out the debt-plagued nation.
While Barnier, a member of Sarkozy’s center-right Union for a Popular Movement Party, understands English and often corrects his translator, he prefers to answer questions in French. He gave his first speech in English as commissioner at a conference in Brussels on April 26.
Barnier is frustrated at waning political will to push through tougher financial regulation. “I’m concerned about time disappearing,” he said.
He will mix these concerns with diplomacy during his scheduled meetings with Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein, Citigroup Inc. CEO Vikram Pandit and JPMorgan Chase & Co. CEO Jamie Dimon in New York next week.
Killy, who is helping to plan the 2014 Winter Olympics in Russia, is still in touch with Barnier, noting that one of his countryman’s strengths is making allies.
“When we went into the adventure of the Olympics, about 95 percent of the people said we’d only last six months together,” Killy said. “We started as friends and ended as brothers.”