Dodd-Frank 30 Day Countdown: Day 24

The Status of Regulation in the European Union

With Dodd-Frank taking effect in less than a month, officials on both sides of the Atlantic have been pressuring one another to implement stricter financial regulations, while equivocating on the regulations that they are willing to accept at home.  Michel Barnier, European Commissioner for Internal Market and Services recently explained to well-known think tank the Brookings Institute that the E.U.’s failure to adopt measures similar to Dodd-Frank stemmed from a belief that the U.S. will not follow through on implementing stricter financial regulations. Barnier stated, “you will understand that Europe cannot be naïve.  And will not be naïve.  Equality and reciprocity are not only justified.  They are also necessary.”

It appears that the E.U. is waiting to see the full implementation of Dodd-Frank before deciding on what regulations, if any, they will adopt.  The E.U. is pressuring the U.S. to adopt all of the Dodd-Frank regulations immediately, while offering excuses to delay and weaken the changes to their own financial regulations.  Even the Bank of England has accused the E.U. of thwarting enforcement of the proposed Basel III regulations that correspond to Dodd-Frank.  The Bank of England’s governor, Mervyn King, said in a June 15, 2011 speech to the City of London that he was concerned that “the European Commission will propose a weakening of the Basel Standards.”  It appears that Europe would like to see a situation where their financial regulations are much less restrictive than in the United States.

In the U.S., there is a great deal of concern over what this regulatory gap would mean for the economy.  Pat Duffy, executive chairman of CME Group, expressed his belief that Dodd-Frank is going to make the U.S. a less competitive market when he told the Senate Banking Committee that “they (Europe) are telling our regulators whatever they want to hear, but they are not going to act until we implement a law they think they can take advantage of.”  This suspicion was mirrored by Representative Jeb Hensarling, financial services vice chairman of the House, who pointed out that “Dodd-Frank was not passed in the E.U., and it was not passed in the G-20, so our regulators must take great care” in implementing these restrictive regulations to avoid giving up a major advantage to Europe.

It remains to be seen whether those concerns are justified and if there will be a mass-migration of financial transactions from the U.S. to the less-restrictive environment possibly awaiting them in Europe.

Tomorrow: Australia and Derivative Market Reform

-Michael Fedelan co-authored this post