President Barack Obama's plan to overhaul financial regulation covers everything from mortgages to hedge funds. But reform efforts in Europe may prove more significant for U.S. companies. European regulators are hashing out new rules for banks, insurers, and money managers that could put U.S. firms at a disadvantage.
Why is Europe reaching across the Atlantic? European policymakers, like those in the U.S., want to show decisive action in the wake of the financial crisis and prevent another. The new rules and proposals take aim at U.S. financial firms, a big source of dubious mortgage securities and other investments. U.S. firms will have to play by the new rules—or find a way around them. Otherwise, they risk losing a large pool of buyers, including European pension funds, insurers, and other big investors.
Europe's aggressive stance may also help shape the debate in Congress. Says Elliot Posner, a political science professor at Case Western Reserve University: "We have seen that the one who gets out in front tends to have the advantage."
European regulators are keeping a watchful eye on mortgage-backed securities. In May the European Parliament passed a plan that likely will force banks and others to maintain a 5% stake in the asset-backed securities they create, rather than selling them off completely. Lawmakers reason that firms with more skin in the game will adhere to strict underwriting standards; lax practices fueled many of the blowups in the bust. "European regulators want to make sure regulated institutions aren't being used to offload risky securities," says Rick Watson, managing director of the European Securitisation Forum, a London-based trade group.
The U.S. is mulling a similar law. Whether or not federal lawmakers pass it, U.S. firms may decide to keep a chunk of the investments anyway. If they don't, their securities won't sell in Europe, where investors owned more than $500 billion of U.S. asset-backed securities at the peak. Under the new rules, European banks and other regulated institutions can't own securities in which the issuers don't retain a piece.
DOES THE U.S. MEASURE UP?
U.S. insurers may find themselves in a similar bind. The EU recently established new capital and other requirements for global insurance companies with European operations. The changes—designed to keep insurers solvent—help ease concerns over the near-collapse of U.S. insurance giant American International Group, which had painful repercussions for European firms.
Companies based outside the EU are exempt if their home country has a comparable regulatory environment, standards that are expected to include a single agency overseeing insurance conglomerates. But U.S. insurers worry their current regulatory regime won't pass muster since the industry is governed state by state. Even Obama's plan to establish a federal office to monitor the industry may not mollify the EU. "I think the U.S. will have a problem," says Marike K. Brady, a senior director at the trade group American Council of Life Insurers. If the EU doesn't give the U.S. system the O.K., European regulators could penalize insurers by mandating they keep extra capital on their books.
Regulators in Europe also have set their sights on hedge fund managers. One proposal would force U.S. firms to register with European regulators if they want to market financial products to local investors. Says Richard Frase, a partner at law firm Dechert in London: "It would have a big impact on U.S. investment managers doing business in Europe."