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Sound & Resilient Financial Markets: Achieving Global Consistency

US-EU Financial Markets Regulatory Dialogue Joint Statement

Speech by Nadia Calviño, Deputy Director-General for Internal Market and Services, EUROPEAN COMMISSION
Presented at Brookings Institution, Washington, DC, 29 January 2014


Ladies and Gentlemen,

I am happy to have the opportunity to discuss transatlantic regulatory efforts to make financial markets sound and resilient.

Today, I would like to take stock of the reforms we have carried out so far and outline the way forward, both in the EU and internationally.

In response to the financial crisis, the EU and the US have launched a major overhaul of financial regulation. The objective was to create a new regulatory framework that would provide for stable, transparent and efficient financial markets.

As a starting point, we had to acknowledge that major financial shocks and crises are truly global. The 2007/2008 banking crisis originated in the United States and it was amplified in the EU. In turn, the Eurozone problems of 2011/2012 certainly had an impact on the U.S.

The responsibility for building this new regulatory framework lies therefore with all of us, regardless of nationality. There is no added value to preaching and teaching. We must move on and work together.This is why we have invested so much effort in designing the G20 global reform of the financial system.

The G20 was essential in establishing the core elements of the new global financial regulatory framework.

It is not there to impose one jurisdiction’s standards on the other parties. The G20 is there to lay the grounds for common standards across the globe. Tonight, I would like to take you through progress in the implementation of the G20 reform on both sides of the Atlantic.

I will in particular: First, briefly give you and overview of the state of implementation of the regulatory agenda in Europe and especially:

  • the recent final agreements on bank resolution and on securities’ market regulation;
  • the progress made in building the European Banking Union;
  • and finally the proposals on structural reforms for banks and transparency in shadow banking adopted by the European Commission today.

Secondly, I would like to share with you our views on the way forward towards a new, solid, transparent and accountable transatlantic framework for cooperation in the field of financial regulation.

And the added value that the Transatlantic Trade and Investment Partnership (TTIP) can bring to both jurisdictions, in this respect.

So, let us briefly look at the implementation of the G20 reform on both sides of the Atlantic.

US Reform

The U.S. has acted fast with the adoption of the Dodd-Frank Act back in July 2010.

We should not forget that the Dodd-Frank Act implements G20 commitments, a point not always emphasised enough here in D.C.

Dodd-Frank has become a brand name for financial regulation in the U.S. It encompasses many areas of financial regulation and sets out the framework for the detailed rules.

The Dodd-Frank principles need to be fleshed out by regulators. U.S. regulators have been extremely busy in the last three years with detailed rules for the various parts of the statute.

We understand that the regulators are now roughly half way through the Dodd-Frank implementation. The work done so far is impressive.  Nevertheless, almost 7 years after the onset of the crisis, there is still a lot to do. For example, rules for money market funds and additional work in regulating credit rating agencies are still on the to-do list.

I guess that the lesson we can learn from the United States would be that it is somewhat easier (and faster) to agree on principles than to put in place detailed rules for every-day use.

If you get it wrong, when drafting detailed rules, you either fail to reach the desired objective to protect financial stability or you negatively affect the financing of the economy. So, you do not want to get that wrong. Getting things right and avoiding unintended consequences take time.

EU Reform

Now, let us have a look at Europe.

We have also embarked, under the authority of Commissioner Michel Barnier, on a historical overhaul of financial regulation.

Our primary goal was to implement faithfully our common G20 commitments in the EU. And to achieve that, we needed to tackle a number of divergent approaches to regulation and supervision, which still existed in the EU.

Therefore, we had to sequence our reform efforts:

First, we reformed supervision – and created three new European authorities to ensure coordination at EU, what here you would call “federal” level for banking, securities markets and insurance.

Second, we have put forward legislative proposals implementing the agreed global standards. Work is most advanced in the field of banking and derivatives.

In contrast to the US approach, we prepared separate detailed legislation for each subject to be regulated.

The legislative proposals are put forward by the EU’s administrative arm, the European Commission. We have two co-legislators, who then adopt the final legislation: the European Parliament and the Council, which is composed of the 28 Member States.

Around 25 major legislative proposals have been put forward by the European Commission since 2008. Nearly all of them have now been adopted.

To be honest, at times it has been challenging to design and to coordinate a reform process which is built on several pieces of legislation for dozens of countries.

But now, when we have all the pieces of the puzzle together, I can say that Europe’s regulatory framework for finance will be as robust as we originally desired. But of course our task is not yet finished: some important implementing rules still need to be finalised and we need to remain vigilant in the face of remaining risks and new international developments, for instance in the area of shadow banking.

Let me briefly mention the three most recent developments, to give you a better idea of where we stand:

Bank recovery and resolution

In December last year, the European Parliament and Council reached an agreement on rules for the recovery and resolution of banks and for harmonized deposit guarantee schemes in Europe

These new rules will allow Europe to effectively manage and resolve crises in the banking sector in a way that avoids massive public bail-outs. The state-of-the-art bail-in principle, which we have introduced, will be instrumental in this regard. And there will be common rules for deposit guarantee schemes, including on their ex ante funding and a clear articulation with resolution processes.

With these laws, Europe not only implements the international standards on resolution as agreed at the FSB. It goes much further and establishes for the entire European Union a detailed, comprehensive and harmonised framework for resolution and recovery, ranging from early intervention to the winding down of banks.


So 2013 ended with very important developments and 2014 has also begun on the right path since just two weeks ago, the European Parliament and the Council, agreed on the rules for securities markets. The “Markets in Financial Instruments Directive (MIFID)” is our main law governing securities trading.

Europe now has agreed a revised market structure framework, which closes loopholes and ensures that trading of equities, bonds and derivatives takes place on regulated platforms.

With MIFID, we have strengthened supervisory powers and met our G20 commitments to enhance transparency and provided for a harmonised position limits regime for commodity derivatives. Overall the new legislation improves transparency, supports orderly pricing and prevents market abuse.

Structural reform

Now, let me present to you another important development which will give additional credibility to the European resolution framework – the proposal for bank structural reform, which was adopted today by the European Commission.

This proposed legislation will try to deal with the one issue which is not fully addressed by prudential requirements: the existence of some banks which are too large and complex to supervise and resolve.

Our structural reform proposal will enhance the resolvability of banks, thereby easing the work of the resolution authorities. It will also reduce cross-subsidisation between the deposit taking part of the banks and their wholesale arms.

This will correct distortions of competition, provide additional protection to depositors and ensure that banks concentrate again on their main function – to provide financing to households and the economy.

Our proposal includes a ban on proprietary trading for the largest banks, with a narrower and more precise definition than the one in the Volcker rule.

Furthermore, the proposal will allow supervisors to require the ring-fencing of other risky activities and establish a clear framework for such separation if certain thresholds are exceeded.

The proposal takes account of mechanisms that have been put in place in some EU Member States and avoids duplication of measures.

We have been very vigilant to ensure that our mechanism could not be circumvented and therefore the reform applies to all EU banks, including their activities abroad.

At the same time, we are ready to waive our requirements if the foreign jurisdiction in question demonstrates to us that it has in place equivalent rules.

Finally, we also presented additional requirements to enhance the transparency of shadow banking activities such as repo and securities lending transactions.

We are leading by example as the EU is among the first jurisdictions to set out rules for these shadow banking activities, fully in line with the FSB recommendations.

To sum up, with the recent legislation on securities and bank resolution and the already adopted legislation on OTC derivatives and Basel III implementation, we are approaching the final stage of our G20 implementation efforts.

We now have in place a regulatory framework that will enable our financial sector to contribute efficiently and safely to growth and job creation.

This framework has been guided by the G20 agenda, but in many areas the European reform goes beyond our original commitments or we apply stricter rules than other parties.

Just a few examples:

We all know that remuneration packages leading to excessive risk-taking and distorted incentives have done us enormous harm.

We have therefore introduced firm limits to forbid bonus structures incentivise excessive risk taking. In this way, we go further than the FSB principles on compensation.

The EU requirements on CCPs and margin requirements are stricter than in other jurisdictions. The requirements for credit and liquidity risk for CCPs in the EU apply to all CCPs, not just to ‘systemically important’ CCPs.

Our MIFID legislation introduces a comprehensive regime for High Frequency Trading. This makes us the leader in this domain.

On shadow banking, the European Commission proposal on money market funds has stricter requirements, in particular capital buffers, than what I understand is contemplated by the U.S..

With respect to securitisation, the EU risk retention requirements have been in force already since 2011.

We have also gone beyond the IOSCO provisions on credit rating agencies as we are stricter in terms of accountability and governance of rating agencies and conflicts of interest and sovereign ratings.

So, I can understand that some may be interested in suggesting that Europe has a light touch approach to financial regulation, but I would urge you not to take such remarks at face value, since they are simply and demonstrably untrue.

The truth is that the EU and the US share the same objectives, we want to have sound and resilient financial markets.  In some areas, the EU has developed a stricter approach. In other areas the EU can learn from the US, for example in the field of bank resolution.

And regulation is only one part of the story. Enforcing the rules through strict and consistent supervision will be equally important. And ensuring that all major jurisdictions around the globe implement the new rules is of course crucial, since risks are global and the solutions cannot depend on the isolated actions of a single jurisdiction, even ones as large and powerful as the US or the EU.

That is why the EU is actively taking part in all G20-FSB implementation reviews. Such reviews are essential to ensure the efficiency on the global reform and to underpin the G20 credibility.

In this sense, I hope that US authorities will reconsider their decision not to take part in the upcoming G20-IOSCO review on Money Market Funds standards as this review was endorsed by G20 Leaders in the Saint Petersburg roadmap.

Banking Union

Before turning to the TTIP, let me briefly update you on the banking union process.

One of the main lessons of the turmoil in the sovereign debt markets is that our economic and monetary union is vulnerable to shocks and cannot be stable without a unified system for the supervision and resolution of banks.

That is why we have created a single supervisor for the Euro area: the European Central Bank will become the sole banking supervisor for all banks in the euro area as of November 2014.

The European Central Bank will assume direct responsibility for around 140 large banks, and indirect responsibility for the smaller ones, working together with national supervisors.

ECB supervision is mandatory for all euro area banks.  Other EU countries are free to join, if they wish so.

The ECB is now preparing for its new role, and it is carrying out a comprehensive balance sheet assessment of the largest banks.

Crucial aspects like non-performing loans or risk weightings are being assessed under common rules for the entire Euro area.

And in that process, the ECB can already avail itself of key powers allowing it to directly access all the information it needs from banks.

In parallel to the comprehensive assessment run by the ECB, the European Banking Authority is coordinating a Stress Test for the whole EU.

This means that in the third quarter of 2014 we will have a full picture of the EU banks’ health and the potential capital gaps to be filled. This will provide us with the opportunity to enhance further confidence in the European banking sector.

The asset quality review is an important exercise for the launch of the new system, but it comes at the end of a long process of restructuring and repair of banks’ balance-sheets in Europe. Let me remind you that since 2008, EU banks have already substantially strengthened their capital position, through both public capital injections and the issue of new equity to private shareholders.

According to our calculations, total equity of EU banks has increased by around 500 billion EUR between 2009 and 2012.

The FDIC has compared the EU and US global systemic important banks. It concluded that there are no major differences at all between big banks in the EU and the US in term of levels of capital and leverage.

With a single supervisor in place, our system now needs to be complemented with a single European resolution authority that can close banks deemed unviable by the supervisor.

The resolution authority must have the necessary financial means to be able to intervene in emergency situations.

In the U.S. this role has been assumed by the FDIC, which uses funds collected from the banks and is backed by the US Treasury.

In the EU we are going for a similar set-up, adapted to our needs.

We are currently establishing a European authority – the Single Resolution Board – with strong powers to resolve all banks in the euro area. And access to a Single Resolution Fund based on contributions from the close to 6000 banks in the Eurozone.

With better capitalized banks and strong bail in provisions, this Fund will be the private sector common insurance system to allow for the orderly restructuring and winding down of non-viable banks.

Therefore, the Board should be able to handle situations of the scale of the last crisis.

We will have governance structures that fit the needs of the European Union, which is not a state, but a group of states with a high degree of integration.

After the first agreement in the Council at the end of last year, we have now entered the final legislative phase, where there needs to be an agreement also with the European Parliament. We are still discussing a number of important aspects, such as the overall architecture of the European resolution system and financial backstops.

EU countries are understandably assessing the mutualisation of banking risks very prudently.

But I can assure you that all Member States and the European Parliament want to set up an efficient and credible resolution framework for Europe.

So far, we have always delivered, I do not see why we would not deliver this time.

To sum up, we are establishing a true Banking Union, with reformed supervision and resolution frameworks. This Banking Union will, with other measures we are taking, help prevent a repetition of the 2011/2012 sovereign debt crisis in the Euro area. The independent and supra-national supervision of banks by the ECB, together with effective and solidarity-based resolution arrangements, will help break negative feedback loops between sovereigns and banks – ensuring the integrity of the euro zone and the stability of its banking system.

EU-US cooperation

Now, let me turn to what the EU and U.S. should do together in the field of financial regulation.

In July 2013, the EU and the US launched negotiations on a Transatlantic Trade and Investment Partnership (TTIP).

I believe that the word “Partnership” was chosen intentionally. The negotiation should go beyond traditional trade issues.

The main added value of the agreement will be to reduce regulatory  friction. That is the official and shared intention of the US and the EU for the TTIP.

Financial markets are at the heart of our economies and financial regulation must be at the heart of these negotiations. If there is one industry which is globalised and inter-connected, and where regulatory friction can harm the wider economy, it is the financial industry. So leaving financial services out of the agreement would be huge mistake – and potentially an error that we would deeply regret in the future.

The fact that both the EU and U.S. are seriously implementing international standards is a good basis for our joint work.

These standards constitute a common platform. They give direction and guidance. But they are not sufficiently precise to ensure coherent legal frameworks, which we need for financial markets to work efficiently and seamlessly.

To achieve that, we must work together on the fine details of financial regulation. Identify differences and eliminate, or at least mitigate, their detrimental consequences – be it for financial stability or market efficiency.

Some of these differences in detailed domestic regulations are deeply rooted in EU and US legal and market structures and are unavoidable.

But others are not and they cannot be justified on prudential grounds.

Inconsistencies are not only significant barriers to trade and investment, but they also undermine the global financial stability that both the US and EU are seeking to achieve.

If the EU and US rules are not consistent, we prepare the ground for regulatory arbitrage or for a duplicative application of rules.

Moreover, regulatory fragmentation weakens the resilience of financial markets and makes it much more difficult for our economies to recover and grow sustainably.

This would certainly fall short of the internationally agreed objectives, which our respective leaders signed up to in the G20.

The EU and the US already have regulatory discussions within the framework of the Financial Markets Regulatory Dialogue (FMRD).

Tomorrow we will be having a full day of discussions with the US Treasury and the regulators. I hope a renewed sense of commitment towards much greater cooperation will emerge. We should agree on a precise work-plan to tackle a number of regulatory inconsistencies, for example in areas such as banking, derivatives and insurance.

The current dialogue has achieved some successes over its lifetime.

However, in the post crisis era where we have fundamentally upgraded financial regulation on both sides of the Atlantic, we must upgrade the mechanisms for regulatory co-operation.

Financial regulation is too important to be discussed ad hoc, in informal and opaque settings at the very last minute, under market pressure.

The EU therefore proposed that the TTIP establishes a framework for regulatory cooperation in financial services.

Our proposal is based on common sense. It aims at harnessing the accountability and the political push that accompany the TTIP, while leaving the work on regulation to the regulators themselves.

Our proposal has met with a lot of opposition from some in Washington. And my impression is that this opposition is mainly based on a misunderstanding of the EU’s motives.

Let me dispel some myths about what are we proposing in the TTIP:

The EU proposes to establish a transparent, accountable and rule-based process which would commit the two parties to work together towards strengthening financial stability.

For that to happen, we would base our work on a number of principles:

• We want to work with the U.S. to ensure timely and consistent implementation of internationally-agreed standards for regulation and supervision.

• We want to set a system of mutual consultations in advance of any new financial measures that may significantly affect the provision of financial services between the EU and the US.

• We want to jointly examine jointly existing rules that can create duplications, inconsistencies or unnecessary barriers to trade.

• We want a commitment that both jurisdictions will assess whether the other jurisdiction’s rules are equivalent in outcomes.

These principles would be backed up by specific arrangements for the governance of EU-US regulatory cooperation.

We would agree on guidelines for equivalence assessments and commitments to exchange necessary and appropriate data between regulators.

The ultimate objective of the EU proposal is to commit to mutual outcome-based assessments of rules.

Should the rules of each jurisdiction have the same outcome, we should be able to defer to the rules of the other jurisdiction. The G20 has already agreed that this is the way forward in the area of derivatives. We must aim for that also in other sectors.

I want to stress that we do not envisage general binding declarations of the equivalence of the entire regulatory framework.

We would always need to carry out a detailed assessment of the rules.

And the regulators would still have the possibility to take necessary measures to protect financial stability.

The prudential carve-out is there to stay.

Regulators would only be bound by the principle of good cooperation and would need to take into account the potential impact of the rules on the other party when making a proposal.

They would need to factor in negative implications for the other party and explain the choices made if such implications were to remain in the final rule.

Now, and that is maybe even more important, let me stress once again what we do not want from the TTIP:

First, we do not want to negotiate within the TTIP any aspect of substantive financial regulation.

The substance of international standards and of domestic prudential rules should be discussed between regulators outside the TTIP.

Second, and as a corollary, we do not want to influence through the TTIP on-going regulatory efforts in the US. Discussions on Foreign Banking Organisations or Accounting should take place on their own merits outside TTIP.

But what TTIP should bring about are stable, effective and transparent arrangements for us to work together.

This would, in the long run, pave the way towards an integrated and stable transatlantic financial market.

Without this framework, in a few years’ time, when the crisis has passed from memory, we may end up regulating under purely national considerations and foster the fragmentation of markets – with costly consequences for our economies, societies and people. Worse, we could sow the seeds of the next crisis.

The benefits of transatlantic cooperation are clear:

• It would strengthen financial stability, as potential problems would be spotted together and addressed jointly. Furthermore, greater coherence could significantly reduce instances of regulatory arbitrage.

• By bridging regulatory divergences we would create a larger and more efficient market place for EU and US financial firms.

• It would improve the ability of the integrated financial system to provide financing to the real economy.

• Finally, an integrated transatlantic marketplace would have a major global impact on financial markets and regulation and would solidify the leading role that the EU and the US play in financial regulation. It would make it easier for other jurisdictions to improve the regulation of their own markets, with positive effects for global financial stability.

Let me conclude:

The EU and US have a joint responsibility to create a safe and sound transatlantic regulatory framework for financial services.

We have made great progress in the last years. But we need to walk the rest of the road together if we want to avoid another major crisis in the future.

Our successes and our failures have global impacts. We can either succeed together or fail separately. I don’t need to tell you which option we prefer!


In this context also see: EU – US TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP): Cooperation on Financial Services Regulation