EU’s Barnier Says Convergence Can Prevent Regulatory Arbitrage

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EU Commissioner Michel Barnier
Michel Barnier, the European Union's internal markets commissioner. Photographer: Hannelore Foerster/Bloomberg

U.S. and European regulators must work toward convergence on financial-industry rules that prevent firms from benefiting from regulatory arbitrage, European Union financial markets commissioner Michel Barnier said.

“I want to make sure we act in parallel,” Barnier, the EU’s top financial regulator, said yesterday during a Bloomberg News interview in Washington. “We are not there yet.”

Barnier came to the U.S. capital to meet with officials including Treasury Secretary Timothy F. Geithner as he pushes for greater coordination on rules to govern firms whose failure might imperil the global economic system, as well as the $601 trillion over-the-counter swaps market.

Differences have emerged between the U.S. and EU since leaders from the Group of 20 biggest industrialized and emerging economies agreed after the 2008 credit crisis to implement broad financial regulation principles by the end of 2012. Regulators should strive to ensure the rules are as close as possible or allow for reciprocity agreements, Barnier said.

“Europe is not going to be under American supervision,” he said. “The message I want to send to the American authorities and to the representatives and senators of both parties is that, do not put into any doubts my resolve to do reciprocity. There will be reciprocity. There will be either convergence or reciprocity.”

Barnier, saying “capitalization cannot be the only answer,” urged regulators to determine which financial firms pose systemic risk before discussing how to write rules. That view is at odds with the Dodd-Frank Act, which requires greater supervision of banks with at least $50 billion in assets and financial firms deemed systemically important by regulators.

‘Volcker Rule’

Barnier said European regulators won’t seek a measure similar to Dodd-Frank’s “Volcker rule,” which aims to limit banks’ risk-taking by restricting proprietary trading and their ability to invest in hedge funds and private-equity funds.

“We don’t have the same approach,” he said.

Differences in derivatives rules between countries will put U.S. banks at a disadvantage when they compete for overseas business, lawyers at New York-based Sullivan & Cromwell LLP wrote in a Feb. 22 letter to U.S. regulators on behalf of Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co.

In their initial Dodd-Frank proposal for margin and capital requirements for swaps, bank regulators said foreign swaps pose “no lesser risk” to a U.S. company because of their location.

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