Getting to Yes on Transatlantic Financial Regulation

WASHINGTON, DC – As 2014 gets underway, signs of a fraying regulatory relationship between the European Union and the United States seem to be everywhere. The US Federal Reserve’s tough new regulations on foreign banks have spurred the European Commission to threaten retaliation. Progress toward reconciling US and EU rules on derivatives – one of the main causes of the financial crisis – has fallen apart. And plans by the EU and the United Kingdom to “ring-fence” bank deposits are poised to depart in form and substance from one another and from the newly unveiled Volcker rule in the US.

But the lesson that most observers draw from these increasingly high-profile disputes – that, even in financial regulation, power politics trumps the common good – is incomplete. After all, regulatory disparities are not just a product of divergent national interests; how effectively diplomacy is practiced and coordinated can play a role as well.

For example, a recent study highlighted the failure of G-20 leaders to define a consistent and achievable roadmap for implementing the financial-reform agenda announced after the 2008 crisis. For roughly the past decade, heads of state have been calling on regulators to tackle big issues, such as capital standards, along with other matters like over-the-counter derivatives and credit-ratings reforms. But, during this period, officials have acted more or less at their discretion, leaving problems to be addressed according to different economic and political cycles.

Radical disparities between the rule-making cultures of the US and the EU are exacerbating the problem. Unlike the US, where independent agencies lead the rule-making process according to Congressional dictates, legislative actors in Brussels and Strasbourg – the European Commission, the European Council, and the European Parliament – set regulatory agendas and write the rules. And, though EU agencies like the European Central Bank are assuming an increasing share of regulatory responsibility, divergences in decision-making procedures continue to affect the rate and nature of transatlantic coordination.