EU official warns U.S. not to delay Dodd-Frank

Dave Clarke and Julien Toyer

WASHINGTON (Reuters) – The United States should not delay or weaken planned changes to the government oversight of financial markets, a top European official warned Friday.

Officials on both sides of the Atlantic are engaging in regulatory gamesmanship, defending their efforts to implement changes while noting that the other side must be as vigilant.

U.S. and EU officials are pushing back against the idea that either will favor lax regulation as a way to attract capital and more financial services business to their shores.

“What happens in Europe matters to the United States and what happens in the United States matters to Europe,” Michel Barnier, European Commissioner for Internal Market and Services, said in a speech Friday at the Brookings Institution, a left-leaning think tank.

U.S. regulators are in the process of implementing hundreds of rules required by the 2010 Dodd-Frank financial regulatory oversight law. They span derivatives regulation, heightened capital rules, restructured banker pay, and hedge fund registration, among many other reforms.

Republicans in Congress as well as banking groups have called for delaying or scaling back many of the rules.

Barnier said such actions would be a mistake and that Europe and United States both need to aggressively implement changes to financial markets following the 2007-2009 financial crisis.

“I have heard calls here in the United States that the Dodd-Frank implementation should be postponed or weakened,” said Barnier. “Delay is not the answer. Europe is committed. We will deliver. And I call on the United States to do the same.”

In particular, he cited the need to move quickly on changes to the way derivatives markets are governed.

“We need common rules to ensure market safety, soundness and access,” he said. “Not divergence that will cause confusion and conflict.”

Last month a U.S. House of Representatives panel approved legislation that would delay new regulations aimed at the $600 trillion derivatives market until September 2012.

The postponement measure is not expected to become law, asSenate Democrats and the White House oppose it. The U.S. Treasury Department has been firm that the United States must move quickly in finalizing financial reforms.

Barnier has been meeting with U.S. officials this week, including Treasury Secretary Timothy Geithner.

Of particular concern is coordination on Basel III capital levels. The G20 has agreed to force banks to hold top-quality capital equal to 7 percent of their risk-bearing assets, more than triple the current standard.

The U.S. Treasury Department said in a statement Thursday: “Secretary Geithner was encouraged by Commissioner Barnier’s commitment to implementing Basel agreements in full and on time.”

In his speech, Barnier said there are fears in Europe that the United States will not fully carry out regulatory changes.

“I know that this is not the intention,” he said. “But you will understand that Europe cannot be naive. And will not be naive. Equality and reciprocity are not only justified. They are also necessary.”

Barnier acknowledged that in some areas U.S. regulators are ahead of their European counterparts.

This fall Barnier plans to put out a proposal for how the EU will manage the failure of large banks, a process U.S. regulators have called a key to ending the notion that some institutions are too big to fail and will be bailed out by taxpayers.

“This may perhaps be the most important reform during my mandate as a European Commissioner,” he said.

U.S. regulators have already laid out a plan for how the government will seize and liquidate large, failing institutions.

These rules are required by the Dodd-Frank law. Republicans have criticized the resolution system, arguing a modified bankruptcy process would better guard against bailouts.

U.S. regulators have said their plan will protect taxpayers money and impose losses on creditors and shareholders.

Speaking of his yet-to-be-unveiled plan, Barnier said ”bankers, shareholders and creditors must understand that they will carry the costs of a failure.” (Reporting by Dave Clarke, Editing by Lisa Von Ahn and Gunna Dickson)