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EU keeps eye on US financial regulation bill

By Emma Vandore
AP Business Writer / April 21, 2010

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LONDON—The European Union is hoping the financial overhaul moving through Congress will converge with EU calls for more regulation to fix the failures that led to the 2008 banking and credit crisis.

The U.S. overhaul is being welcomed by EU leaders from French President Nicolas Sarkozy to British Prime Gordon Brown, who have long argued for the need to reign in the financial system -- but trans-Atlantic accord starts to falter however when leaders move from broad goal-setting to implementation and details.

In particular, European officials are skeptical of proposals to ban banks from risky trading on their own behalf. They fear it would handicap global European financial players such as Deutsche Bank AG and France's BNP Paribas SA.

If enacted, the Volcker rule -- named for Obama adviser and former Federal reserve chairman Paul Volcker -- could force European banks to change the way they operate in the U.S., according to analysts including Richard Portes, president of the Center for Economic Policy Research in London.

"There is opposition to that in Europe and in particular on the continent," he said. "It's very unlikely to be emulated."

Deutsche Bank chief Josef Ackermann has called the proposal "problematic," saying giving up integrated financial markets would hurt Germany economically. The ban on proprietary trading, proposed by President Obama, has found resistance from some legislators and there have been proposals to soften it.

Chantal Hughes, a spokeswoman for the European Commission, says that the European banks have a different model to their U.S. counterparts and "solutions adapted to the US market are not necessarily suitable for the EU."

Beside plans to restrict bank's trading activities, House and Senate bills would govern previously unregulated derivatives blamed for helping spread the troubles, create a mechanism for liquidating large firms, and establish a consumer protection agency to police lending, credit cards and other bank-customer transactions.

Europe is also keeping its eye on U.S. moves to change the way derivatives -- complex financial products whose values are based on the values of other investments -- are bought and sold. The proposal is designed to increase transparency by putting the trades through exchanges.

What the U.S. does could affect moves in Europe, where moves to regulate derivatives are also afoot.

The EU's financial services commissioner Michel Barnier, due in the U.S. on May 10-12, told a London audience in March that Americans "are even ahead of us" on regulating derivatives trading and he wants Europe to catch by the summer.

The commission will present plans in June, said Hughes.

"The U.S. can have a major influence on Europe," said Portes. If U.S. legislation includes "a requirement that derivatives be traded on exchanges then there will be huge pressure for Europe to adopt a smilier position."

The difficulty for Europe in advancing its own agenda at global gatherings such as the Group of 20 summits is that the bloc's 27 nations sometimes have competing aims. They're often split between France and Germany, which favor more rules, and Britain, which takes a more hands-off approach.

France and German attempts to press for a cap on bonuses failed at the G-20 summit in Pittsburgh last year, where after U.K. and U.S. opposition, leaders agreed to a number of less controversial measures designed to reduce risk taking incentives in remuneration packages.

There is a similar split over the regulation of hedge funds, a target of France and Germany even before the crisis.

The EU is moving towards new rules for hedge funds which could block foreign funds from Europe if they don't face tight oversight at home.

Treasury chief Tim Geithner has complained that extra requirements for foreign-based funds could be a protectionist barrier that goes against G-20 commitments for all regions to coordinate reforms.

Britain is also fighting stricter rules, but officials say it is isolated. EU governments spared Prime Minister Brown political embarrassment by postponing attempts to strike a deal until after Britain's May 6 election.

Still, Germany and France will likely make a joint proposal at a meeting of G-20 finance ministers this week for the inclusion of hedge funds in the new financial market and oversight rules, a high-ranking German Finance Ministry official said this week.

"France and Germany's stance is to extend regulation in previously unregulated entities," said Philip Whyte of the Center for European Reform in London. "The U.S. and U.K. priority is to make sure we revise the way banks are regulated."

Indeed internal splits -- within Europe and also between Democrats and Republicans in the U.S. -- may be greater than the trans-Atlantic divide.

Douglas Elliott, a fellow at the Washington DC-based Brookings Institution, said that American conservatives are generally distrustful of more regulation, in contrast to the mainline European view.

"The Democrats are somewhere in between the two, but closer to the European view," he said. "They still want to leave a role for the markets but they believe that the crisis has demonstrated a clear need for more regulation."

Republican leaders appeared to be softening their opposition to the Democratic-written bill, praising bipartisan negotiations that continue to take place.

It's not yet clear whether a new tax on large banks will be part of the bill, although it appeared to be picking up support in Congress as Democrats target financial institutions that benefited from the Wall Street bailout to help pay for their jobs program and other election-year initiatives.

Among G-20 countries, Germany and France are in favor of taxation to pay for future rescue packages, but Canada, whose system weathered the global financial meltdown, is holding out against any tax on banks.

The United States, Britain and other governments spent billions of taxpayer dollars bailing out banks and other institutions during the meltdown that began in 2008. The bailouts prompted widespread resentment among citizens who felt the bankers were getting special treatment.

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Associated Press writers Verena Schmitt and Matt Moore in Berlin, Jim Kuhnhenn in Washington, Jane Wardell in London, Sylvie Corbet in Paris, Bradley Klapper in Geneva, and Malin Rising in Stockholm contributed to this report.