President Obama signing the Dodd-Frank Wall Street Reform (source)
By Nicholas Beaudoin
A bitter spirit crafted from Europe’s premium regulators and the choice of international financial conglomerates everywhere
The Trans-Atlantic Trade and Investment Partnership (TTIP) continues a long tradition of securing market access to ensure the free flow of goods and services between the United States and European Union. While the economic benefits of reduced tariffs will be felt across both sides of the Atlantic, stringent financial and prudential banking regulations in the US will be weakened if European demands are acquiesced to in TTIP. Key provisions under US laws in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will be superseded by a diluted free trade agreement that favors a return to the high-risk, unregulated investment practices that precipitated the global financial crisis in 2007.
The lead up to the US financial crisis from 2007 to 2009 saw the emergence of a litany of new financial instruments with names previously only seen in bowls of alphabet soup. Derivative instruments such as MBS, CDO, CDS, CMBO, and CLO evolved during the previous two decades to transfer risk by obfuscating the true value of underlying securities. Overleveraged, deregulated and predatory, the US financial landscape at the end of 2009 was in a state of disrepair. Today, just four years after the Dodd-Frank financial reforms, all economic indicators reflect the tremendous American resurgence in housing, employment and general public opinion towards financial market institutions.[1]
If successfully passed as a Congressional-Executive Agreement, TTIP would impact Dodd-Frank by superseding US federal regulations in exchange for diluted European financial standards. In the words of Chief Justice John Marshal, the US “constitution declares a treaty to be the law of the land. It is, consequently, to be regarded in courts of justice as equivalent to an act of the legislature.” Any free-trade agreement passed by the authority of the President and Congress will take precedence over previous Dodd-Frank rules.
TTIP has the capacity to affect US financial reforms in four ways.
First, Dodd-Frank grants federal regulators increased powers over the stewardship of failing systemic firms, while the European resolution framework is weaker due to disagreements between member-states over trans-national Banking Union authority.[2]
Second, while the Volcker rule in Dodd-Frank will restrict banks from proprietary trading, the proposed European plan under EU Commissioner Michel Barnier gives certain banks exemptions to skirt such requirements.
Third, prudential capital requirements for investment banks, known as “leverage-ratios,” are not uniform between the US and EU. This has led firms, such as Frankfurt’s Deutsche Bank and London-based Barclays, both with significant subsidiaries operating in the US, to deregister their US branches in order to skirt Dodd-Frank asset-holding requirements. Capital requirements within Dodd-Frank have protected consumers from systemic bank failures, yet European institutions have yet to standardize such protections.
Finally, the framework to complete Dodd-Frank rulemakings, which passed as one omnibus piece of legislation on July 21, 2010, varies tremendously with European agencies preference to negotiate on regulations issue-by-issue.
The stance of the US Executive branch has been to utilize international forums to reach consensus on financial regulations. Led by guidelines set out in the November 2008 G20 meeting in Washington, DC, organizations such as the Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) have established harmonized financial and prudential regulations that are in line with Dodd-Frank. Such forums have led to strong rules in Basel III capital requirements, proper classification of Systemically Important Financial Institutions (SIFIs), the Financial Markets and Regulatory Dialogue’s (FMRD) oversight on regulating over-the-counter derivatives and the International Organization of Securities Commission’s (IOSCO) guidelines on securities trading.
The bottom line is that financial regulatory convergence is too complex and intricate an issue to settle in one agreement. International forums are already in place to handle the myriad disputes that exist between divergent regulatory bodies. To demand that each European country have the same stringent standards as the United States is simply far-fetched. If TTIP is passed and agreed to through Congressional confirmation, it will lead to regulations that are in line with the lowest common denominator; the country with the lowest level of financial and prudential enforcements will become the blueprint for US law.
Nicholas Beaudoin is a second year graduate student at IR/PS studying international economics with a focus on China. He graduated from Lewis and Clark College in 2007 with a B.A. in Political Science and has worked on California State Assembly and Senate campaigns, including writing economic policy memos for a recent Congressional candidate.He spent the summer of 2014 as a fellow at the US House of Representatives Committee on Financial Services working on financial and prudential regulations
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[1] Yellen, Janet. “Semiannual Monetary Policy Report to the Congress.” Committee on Financial Services. US House of Representatives. July 16, 2014.
[2] Gordon, Jeffrey N., and Wolf-Georg Ringe. "Bank Resolution in the European Banking Union: A Transatlantic Perspective on What It Would Take." Columbia Law Review, Forthcoming Columbia Law and Economics Working Paper. No. 465 (2014).