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6/22/2020 Remarks by Acting Assistant Secretary Mark Sobel Transatlantic Legislators’ Dialogue December 5, 2009 U.S. DEPARTMENT OF THE TREASURY Press Center Remarks by Acting Assistant Secretary Mark Sobel Transatlantic Legislators’ Dialogue December 5, 2009 12/5/2009 TG-429 Introduction Thank you for inviting me to speak. The U.S. and EU are the world's two largest economic areas, accounting for 54% of global GDP and 65% of global capital markets. We thus bear a special responsibility for the sound management of the international financial system. Our cooperation has been central to the world's efforts to overcome the crisis. I will highlight two areas where our close collaboration has made a difference and where ongoing efforts will be critical for the future: restoring global growth and strengthening financial regulation and supervision. Restoring Global Growth In the last year, we witnessed the deepest economic collapse in decades. Whereas during the Great Depression, the downturn lasted for many years and countries turned inward and resorted to protectionism, the current crisis response has been marked by multilateralism and extraordinary cooperation through the G-20. Now, only a year after the tumultuous events of last autumn, financial markets have stabilized and a modest recovery is underway. With global GDP contracting at a 6.7 percent annual rate at the turn of the year , the G-20 undertook a massive fiscal stimulus, including discretionary spending and automatic stabilizers, equal to nearly 6 percent of 2009 GDP. The fiscal stimulus is expected to average 6.5 percent of GDP in the U.S. and 5 percent of GDP in the EU in 2009/10. Monetary policy became highly accommodative, countries recapitalized financial institutions, and liquidity support was provided to unclog markets. Financial market spreads came down, and GDP grew at an annualized rate of 2.8 percent in the U.S. and 1 percent in the EU in the last quarter. In the United States, the strong efforts of the Federal Reserve, the bold financial stabilization initiatives of the current and prior Administrations, including the transparent stress tests under the Supervisory Capital Assistance Program, and the fiscal stimulus pursuant to the American Recovery and Reinvestment Act have restored confidence and begun to revive economic growth. Europe, at the regional and national level, reacted as well with significant macroeconomic accommodation and financial sector support. Together, we combated the contagion risks facing emerging markets. But as we emerge from the crisis, there is no room for complacency and we must continue our close cooperation. Unemployment remains unacceptably high and financial market stresses abound. Growth remains our dominant policy imperative. First, G-20 countries need to design strategies to be ready to unwind the extraordinary government support provided during the crisis once recovery is assured. But premature exit must be avoided. As the U.S. and EU are the two largest economic areas in the world, both sides of the Atlantic must stay highly cognizant of and attuned to this reality. Second, the G-20 countries must cooperate to achieve a durable recovery, avoiding past excesses. As U.S. consumers save more and as our government embarks on a path of fiscal consolidation, economies with large and sustained surpluses must shift growth towards domestic demand and reduce reliance on exports. It would neither be healthy nor realistic for the global economy to rely on a single engine of import demand going forward. Greater contributions to global demand must come from key emerging markets, and also from advanced surplus economies. One of the key outcomes from the Pittsburgh Summit was the commitment by G-20 members to a Framework for Strong, Sustainable, and Balanced Growth. Last month, G-20 Ministers set out a detailed process and timeframe for achieving the Framework's goals, and launched a new consultative mutual assessment process to evaluate whether individual country policies will collectively deliver our agreed objectives. The United States and European Union must lead in vigorously carrying out this Framework. Financial Regulatory Reform https://www.treasury.gov/press-center/press-releases/Pages/tg429.aspx 1/3 6/22/2020 Remarks by Acting Assistant Secretary Mark Sobel Transatlantic Legislators’ Dialogue December 5, 2009 The largest financial crisis in generations revealed gaps in our regulatory system that allowed the build-up of excess leverage and risk. The U.S. and EU have been leaders in forging the G-20's extraordinary response to create a stronger and more resilient financial system. However, in doing so, we do not face a European and American challenge. We face a global challenge. The crisis demonstrated that financial stress can spread easily across national boundaries. Yet, regulation is still set largely in a national context. Without consistent supervision and regulation, financial institutions will tend to move their activities to jurisdictions with looser standards, creating a race to the bottom and increased systemic risk. National regulation should thus be made more consistent and convergent across the globe, and national regulators, working through standard-setting bodies, have strengthened their cooperation. The Financial Stability Board (FSB) has been at the center of this effort, loosely coordinating the activities of standard setting bodies, while respecting their independence, and putting forward recommendations which have been endorsed by the G-20. This strategy to strengthen financial regulation is working, in my view, and the U.S. and the European Union have reached many agreements, providing the critical engine for its success. For example, the Pittsburgh Summit focused on four areas. Capital. The crisis demonstrated that capital and liquidity requirements were too low. G-20 Leaders agreed to develop rules to improve the quantity and quality of bank capital, to achieve a non-risk based leverage ratio by end-2010, and implement them by 2012. The Leaders' agreement recognizes that strengthening capital standards is at the core of the reform effort. Compensation. Compensation practices at some firms created a misalignment of incentives that amplified a culture of risk-taking. In Pittsburgh, G-20 Leaders endorsed FSB implementation standards to help significant financial institutions and regulators better align compensation with long-term value and risk management. In the U.S. and EU, consistent with these implementation standards, national supervisors will review firms' compensation policies and structures and impose stricter measures on firms with unsound practices. Over-the-counter (OTC) derivatives. OTC derivatives, while helping to disperse risk, also allowed hidden risk concentrations to build up. G-20 Leaders agreed that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by end-2012. Further, they affirmed that non-centrally cleared contracts should be subject to higher capital requirements. Cross-border banking resolution and crisis management. G-20 Leaders agreed to establish crisis management groups for the major cross-border firms and to improve cross border resolution mechanisms and strengthen national frameworks for resolution of financial firms. Prudential standards for the largest, most interconnected firms should be commensurate with the costs of their failure. U.S.-EU Cooperation The United States and European Union – with the world's two largest capital markets – must work to ensure that regulation is sound and consistently implemented across borders, while preserving the dynamism of global markets. To do so, we must intensify our cooperation and implement G-20 priorities in line with the Leaders' vision. Surely, we cannot and will not be identical. But as we implement legislation, the U.S. and EU cannot carve themselves out from standards or deviate significantly, lest we expose global markets to the risk of fragmentation. Nor can we seek to impose standards on one another. We must also work together to achieve high quality regulatory and supervisory outcomes so that our firms can operate in each others' jurisdictions without encountering needless friction. But in translating high-level standards into concrete proposals, especially when filtered through our national traditions and cultures, difficulties can emerge with the devil in the details unless we cooperate closely. Let me briefly mention a few issues on which the U.S. and EU must show leadership and pragmatism in ensuring greater alignment: The U.S. and EU fully agree that credit rating agencies (CRAs) must be subjected to a more rigorous supervisory regime, consistent with the IOSCO Code of Conduct. But we should not go so far as to prevent them from operating globally when they adhere to strengthened standards. The U.S. is working on new legislation to strengthen our existing regulatory regime for CRAs. The EU has passed its CRA Regulation, and we must now work together on the process for equivalence and endorsement so as to ensure the smooth functioning of global markets. We are looking forward to the CESR-SEC collaboration on this topic. The U.S. and EU fully agree that hedge funds above a certain threshold should be registered, and systemically significant hedge funds should be regulated. In the U.S., we are focusing on putting in place a robust regulatory regime for hedge fund managers while ensuring access for third country firms. This will enable us to minimize any potential threat to financial stability, while allowing funds to operate across global markets on the basis of sound management practices. The EU's proposals raise the potential, however, for a different regime for European-based managers, with the ability to access all of the EU with the so-called "passport" of one set of rules, and for third country firms operating under multiple, national private placement regimes without the ability to use an EU-wide passport. It would subject private equity and venture capital firms to the same prudential requirements envisioned for hedge funds, regardless of differences in business models and systemic relevance. The U.S. and EU, in continuing our joint efforts to achieve comprehensive reform of OTC derivatives markets, must respect that global infrastructure is vital to the goal of maintaining efficient, well-integrated markets and clearing and payment settlement systems. To this end, we should work together to advance regulatory cooperation, ensure prudential supervisors have access to the data they need wherever it is located, and coordinate on clearing and exchange-trading requirements and any exemptions for endusers. The U.S. and EU have repeatedly backed the G-20 call for a single set of high quality global accounting standards, while respecting the independence of the standard setting process. Achievement of this objective would yield tremendous benefits for the global economy and significantly enhance transparency for investors. Many difficult issues will need to be tackled along the way by the standard setters, in consultation with stakeholders. We should work together to avoid politicization of the process. I believe that the U.S. and EU can effectively address these challenges. For seven years, the U.S.-EU Financial Markets Regulatory Dialogue has worked through a number of critical issues, such as the third country effects of the Financial Conglomerates Directive, accommodations to Sarbanes-Oxley, a U.S. roadmap to accept public listings by EU firms using International Financial Reporting Standards, European concerns related to de-registration from U.S. markets, and U.S. concerns with the EU Markets in Financial Instruments Directive. https://www.treasury.gov/press-center/press-releases/Pages/tg429.aspx 2/3 6/22/2020 Remarks by Acting Assistant Secretary Mark Sobel Transatlantic Legislators’ Dialogue December 5, 2009 While on the U.S. side, this Dialogue has largely focused on interactions with the European Commission, we have also assiduously reached out to member states, the EU Financial Services Committee, the so-called "Level 3" committees and the European Parliament. Needless to say, working with our own Congress is a critical part of maintaining support for our efforts to reform the U.S. regulatory system and to ensure that our efforts at home move forward in tandem with efforts throughout the world to reform financial systems in line with the agreements among G-20 Leaders. Looking forward, this complex agenda will only benefit from and be strengthened by our discussions with legislators on both sides of the Atlantic. Conclusion In conclusion, since the outbreak of the crisis, the U.S. and EU have successfully worked together in the G-20 to help restore global growth and steer forward enormous reforms to strengthen the global financial system and address the roots of the crisis. We must strengthen our cooperation going forward in order to continue leading the world's efforts to promote a durable recovery, strengthen regulatory and supervisory practices across the globe, ensure that our measures are consistent and do not fragment markets, and allow our firms to operate without friction in each others' market so as to preserve the dynamism of global financial markets. Thank you. ### https://www.treasury.gov/press-center/press-releases/Pages/tg429.aspx 3/3
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