London: The global campaign to harmonise rules for fin-ancial firms is swerving off course, threatening efforts to curb the risky bets that rocked the world economy two years ago.
As US Treasury Secretary Timothy Geithner lands in Europe today, differences are growing among world leaders over how to keep the promise they made at the height of the financial crisis: that they would work together to reshape how finance is governed. Their aim was to avoid another upheaval by making financial rules consistent across borders and closing loopholes. But the US and Europe are increasingly pursuing their own sometimes clashing paths to reform, potentially undermining the regulatory overhauls taking shape on both sides.
If this continues, a resulting patchwork of reforms could allow companies to continue exploiting differences by moving operations to countries where conditions are most favourable and thwart the efforts of regulators to spot financial threats early on. The outcome, for instance, could be very different ways of banking in New York and the financial capitals of Europe, prompting leading US firms to shift their riskiest activities overseas beyond the purview of US regulators.
The evolving divide, analysts say, is spooking investors and contributing along the European debt and euro crisis to the sharp losses in recent days on stock markets from New York to Frankfurt to Tokyo.
"Each nation has said to the other they would work together on this," said Angela Knight, chief executive of the British Bankers Association, "but in fact, we don't see that happening."
Dismay
As Geithner arrives, Europeans are expressing dismay about parts of the overhaul bill approved by the US Senate last week.
European diplomats are alarmed by a measure, introduced by Sen. Susan Collins that they say could force European financial companies to shift significant amounts of capital to their US subsidiaries to cover potential losses.
The Europeans are also worried about a provision that could force US banks to spin off their lucrative trade in financial instruments known as derivatives. The Europeans, who have a one-stop-shopping banking culture that allows firms to conduct a vast array of businesses under one roof, are ready to resist any effort at setting a global precedent excluding banks from the derivatives business. Even in the US, the derivatives provision sponsored by Sen. Blanche Lincoln has powerful adversaries in government and industry, and it may be eliminated from the final bill.
The derivatives rule, along with a separate provision that would restrict financial firms from trading with their own money, could encourage US firms to shift some trading overseas. Although the Europeans could win jobs and market share in financial services, "the US would be exporting its risk to Europe or Asia," said a European diplomat involved in the reform effort.
US officials, in turn, are upset by a German move last week to crack down on a form of speculating known as naked short selling. In unusually harsh terms, a senior US Treasury official on Tuesday described the German action as damaging to the markets and counterproductive. US officials are also taking issue with Eur-ope's push to increase oversight of hedge funds and say this could impede American funds from courting European clients.
In addition, US officials are accusing the Europeans of failing to force banks to beef up their balance sheets with more capital. The US has made this demand on its banks. European officials should be "making it clear to the markets and the international community they have good strong rules in place to ensure the capital base of the banking system going forward, which would help their economic recovery, which in turn would help the rest of the global economy," Federal Deposit Insurance Corp. Chairman Sheila Bair said.
