[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
THE US-EU REGULATORY DIALOGUE:
THE PRIVATE SECTOR PERSPECTIVE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL
MONETARY POLICY, TRADE AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 17, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-95
U.S. GOVERNMENT PRINTING OFFICE
96-291 WASHINGTON : 2004
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Domestic and International Monetary Policy, Trade and
Technology
PETER T. KING, New York, Chairman
CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice BERNARD SANDERS, Vermont
Chairman MELVIN L. WATT, North Carolina
JAMES A. LEACH, Iowa MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware BARBARA LEE, California
RON PAUL, Texas PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois BRAD SHERMAN, California
DOUG OSE, California DARLENE HOOLEY, Oregon
JOHN B. SHADEGG, Arizona LUIS V. GUTIERREZ, Illinois
MARK R. KENNEDY, Minnesota NYDIA M. VELAZQUEZ, New York
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
C O N T E N T S
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Page
Hearing held on:
June 17, 2004................................................ 1
Appendix:
June 17, 2004................................................ 25
WITNESSES
Thursday, June 17, 2004
Oldshue, Paul, Immediate Past President, Bankers Association for
Finance and Trade.............................................. 6
Scott, Hal, Nomura Professor of International Financial Systems,
Harvard Law School............................................. 7
Thornburgh, Richard, Chairman, Securities Industry Association... 4
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 26
Oldshue, Paul................................................ 28
Scott, Hal................................................... 45
Thornburgh, Richard.......................................... 57
THE US-EU REGULATORY DIALOGUE:
THE PRIVATE SECTOR PERSPECTIVE
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Thursday, June 17, 2004
U.S. House of Representatives,
Subcommittee on Domestic and
International Monetary Policy,
Trade and Technology
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:02 a.m., in
Room 2128, Rayburn House Office Building, Hon. Judy Biggert
[acting chair of the subcommittee] presiding.
Present: Representatives Biggert, Feeny, Maloney and
Hooley. Also present was Representative Bachus.
Chairwoman Biggert. [Presiding.] This hearing of the
Subcommittee on Domestic and International Monetary Policy,
Trade and Technology will come to order. Without objection, all
members's opening statements will be made part of the record. I
will recognize myself for 5 minutes for an opening statement.
Good morning. It is my pleasure to chair this hearing on
the US-EU Regulatory Dialogue: The Private Sector Perspective.
I want to thank Chairman Oxley for his leadership on this issue
and for focusing attention on the growing dialogue between
financial regulators on both sides of the Atlantic. There is no
doubt that increased interest in the dialogue reflects the
growth in economic and financial activity on both sides of the
Atlantic, and the interdependency of those growing markets.
It is because of that increased interest and
interdependency that we are conducting this second hearing
today. Held at the full committee level last month, our first
hearing featured those who are official parties to the
dialogue. Government officials from both the U.S. and the EC
had the opportunity to share their views on the status and
outstanding challenges that the dialogue will address in the
near future.
Today, we hear from those who are not official parties to
the dialogue, but who nonetheless have much to add to its
future success. It is the private sector's turn today, and
representatives from the banking and securities markets, as
well as academia, will have the opportunity to voice their
views on how the dialogue should evolve.
One of the great strengths of our capital markets in the
United States is the active engagement of our private sector in
the shaping of emerging laws and regulations. Their involvement
can help us ensure that our system responds quickly and
efficiently to market developments, while at the same time
preventing abuses. We look forward to hearing those views
today.
As we seek to work more closely with our economic partners
in Europe, some in the private and public sectors have
increased their calls for greater trans-Atlantic harmonization
in regulatory standards. I continue to believe that case-by-
case determinations make more sense than would a wholesale
commitment to harmonize, regardless of topic or market
structure. I agree with Chairman Oxley that convergence for
convergence's sake is not a wise public policy choice. I also
doubt that one must endorse convergence up front in order to
achieve greater comparability and mutual understanding. The
success of the dialogue to date has proven this.
Besides addressing the issues of convergence, next steps,
and inclusion of other parties in the dialogue, there is an
issue whether the U.S. government is structured appropriately
to represent our best interests in the dialogue. I look forward
to testimony from our witnesses on whether the dialogue, our EU
counterparts, or other mechanisms for US-EU cooperation are
adequately open to views from the private sector. I look
forward to considering whether the U.S. Treasury structure in
Europe, with attaches in Paris and Frankfurt, but not Brussels
and London, is consistent with the shifting centers of economic
power in Europe during the 21st century.
Specifically, London and Brussels represent the financial
and political capitals of Europe, yet our Treasury Department
still posts representatives in Frankfurt, the location of the
European Central Bank, and Paris, the location of the
Organization for Economic Cooperation and Development. As
important as these missions may be, times have changed and
centers of influence and activity have changed, yet our
resource allocation apparently has not changed.
Financial markets are the engine for economic growth in any
economy. The U.S. and the EU mutually benefit from economic
integration as consumers and businesses find new products and
services available to finance their productivity activity.
Government's role is not to stand in the way of productive
activity. Its role is to find a way of ensuring that minimum
common standards protect the system from abuses.
Our witnesses will provide perspective on whether an
appropriate balance is being struck in Europe and what the U.S.
government can do to better address our goals. I look forward
to hearing suggestions and to advancing the dialogue that is so
important to our economic future.
With that, I would recognize the ranking member for 5
minutes.
Mrs. Maloney. I thank the gentlelady for yielding. I
request permission to put my opening statement in the record in
the interest of time.
I would like to take this opportunity to welcome a fellow
New Yorker who will be testifying today, the chairman of the
Securities Industry Association, Richard Thornburgh. Mr.
Thornburgh is the chief risk officer for Credit Suisse Group
and a member of the Credit Suisse Group executive board. The
Credit Suisse Group through CSFB may be the quintessential
trans-Atlantic firm with operations in Europe and the United
States. It has global capabilities, with offices in 35
countries.
It is clear from Mr. Thornburgh's background that he has a
great deal of experience and expertise on the issues before us
today. I look forward to his testimony. I would also like to
congratulate Credit Suisse on celebrating 70 years of service
in our country. Founded on June 15, 1934, it was the first
public securities firm after the creation of Glass-Steagall and
they are an outgrowth of the First Boston Group.
I might also add that Credit Suisse is a major civic leader
in the city that I am proud to represent, employing over 6,000
New York residents and participating in the civic fabric of our
city. We thank him for being here and for your service to
safety and soundness in our financial institutions, and we look
forward to your testimony.
Thank you.
Chairwoman Biggert. Thank you very much.
Does the gentlewoman from Oregon have an opening statement?
Ms. Hooley of Oregon. I do not, Madam Chair, but I would
like to introduce one of the panelists, if this is the time you
want me to do it.
Chairwoman Biggert. Please proceed.
Ms. Hooley of Oregon. Thank you.
Thank you, Madam Chair and Ranking Member Maloney for
holding this hearing today on the European Union-United States
regulatory dialogue. It is important that we address issues
that are facing U.S. financial firms doing business in the EU,
and to make sure that there is an ongoing and healthy dialogue
between the United States and the EU officials.
I am honored to be joined by a fellow Oregonian who is
testifying today on behalf of private enterprises. Paul Oldshue
has been living in Portland, Oregon since 1978. He has been a
productive and energetic member of our community. He is the
executive vice president and manager of U.S. Bancorp's
International Banking Group. Prior to joining U.S. Bancorp in
April of 1991, Mr. Oldshue headed PacifiCorp Financial Services
Broker-Dealer, led Security Pacific Bank's Oregon Commercial
Lending Group, and served as treasurer of Orbanco Financial
Services Cooperative.
Mr. Oldshue has a BA degree from Williams College and an
MBA from New York University School of Business Administration.
So he is from your area, Ranking Member Maloney. He is past
president and director of the Arc of Multnomah County,
immediate past president and director of the Bankers
Association for Finance and Trade.
I am very happy that you have decided to join us today, and
look forward to your perspective on the ongoing regulatory
dialogue between the EU and the United States. Thank you for
being here.
Chairwoman Biggert. Thank you very much.
I guess I am left to introduce the final witness here.
Professor Hal Scott is the Nomura professor and director of the
Program on International Studies at Harvard Law School. Mr.
Scott is the author of several books, including one recently
published on international financial policy and regulation.
Professor Scott is also a governor of the American Stock
Exchange and a member of the American Enterprise Institute
Shadow Financial Regulatory Committee.
There is some tie to my home State of Illinois. In fact, he
has been working with Ken Dam, who is the Max Pam professor of
law at the University of Chicago. So I guess I will say that we
have somebody that is within this realm.
With that, let me just say that without objection, your
written statements will be made part of the record, then you
will be each be recognized for a 5-minute summary of your
testimony. Following that, then we will recognize for 5 minutes
each the members of the committee to ask questions. So we will
begin with Mr. Thornburgh. You are recognized for 5 minutes.
STATEMENT OF RICHARD THORNBURGH, CHAIRMAN, SECURITIES INDUSTRY
ASSOCIATION
Mr. Thornburgh. Madam Chair Biggert and members of the
subcommittee, thank you for your continued interest in the US-
EU financial markets dialogue and the EU financial services
action plan. My testimony today will stress the following
points:
One: The EU capital markets are a critical source of
capital for U.S. companies and vital to U.S. investors seeking
portfolio diversification.
Two: a U.S. action plan is needed to complement the FSAP
implementation.
The US-EU financial markets dialogue is working. We need to
build on what is now in place. We commend the Treasury
Department for opening a specific dialogue on financial
services issues. The US-EU relationship provides the U.S.
securities industry and its clients with tremendous
opportunities. The EU offers U.S. investors alternative
investment options for portfolio diversification. For example,
U.S. investors own more than $1.3 trillion in foreign stocks,
of which over $700 billion or 53 percent are EU shares. U.S.
holdings of EU bonds total more than $227 billion, or 45
percent of total foreign bond holdings.
The EU also offers U.S. companies an alternative pool of
capital for raising debt and equity. Last year alone, U.S.
companies raised $164 billion in debt and almost $7 billion in
equity in the EU.
Looking forward, we suggest a coordinated U.S. interagency
effort, or otherwise known as a U.S. action plan to fully and
effectively engage EU governments and regulators at all levels
about the need for open and competitive markets. Our action
plan includes, one, the establishment of a Brussels attache;
two, increased Treasury coordination with the State Department;
three, further U.S. Congress-EU Parliament contacts; and four,
coordinated SEC-CESR focus on regulatory conversions.
First, we strongly believe that the U.S. Treasury
Department should place a financial attache in Brussels. Such a
post would advocate U.S. industry interests and support the
dialogue. In this regard, we support additional funding to
bolster Treasury's ability to advocate U.S. interests in the
global marketplace. The expected pace of change in the EU
financial market over the next years justifies this type of
focused presence at the center of the newly expanded EU.
Second, Treasury clearly has the leadership role in the
dialogue. We believe, however, the U.S. State Department
through its embassies and consulates in all 25 member states
can enhance and support Treasury's efforts. This activity is
essential because individual EU member states can and often do
play a pivotal role in key EU legislative decisions.
Third, we firmly endorse the further development of greater
understanding and closer relationships between key financial
services legislators in the U.S. Congress and the European
Parliament. We believe these efforts should encourage
constructive discussion of existing extraterritorial issues
such as Sarbanes-Oxley and the EU's financial conglomerates
directive; facilitate and encourage mutual prior consultation
on legislation with potential extraterritorial effects to help
prevent future conflicts; and identify common future
legislative goals and common solutions wherever possible.
Finally, we welcome the new SEC-CESR effort for cooperation
and collaboration. SIA's support of this regulatory dialogue is
consistent with the industry's goal to minimize regulatory
differences and improve the efficiency of the trans-Atlantic
markets through regulatory convergence. To this end, SIA has
proposed a number of issues that could be resolved in the near
term to mutually benefit the marketplace. The areas in which we
have suggested that the SEC and CESR study convergence are,
one, public offering documents beginning with nonfinancial
disclosure; two, broker-dealer registration requirements;
three, rules relating to credit rating agencies; four,
international anti-money laundering standards that not only
promote uniformity and cooperation and efficacy, but also
allows for reliance on financial intermediaries across borders;
and five, corporate governance standards.
Lastly, the U.S. securities industry still has significant
concerns about the implementation of the EU's financial
conglomerates directive. We urge the subcommittee to monitor
the situation carefully.
The U.S. securities industry plays a vital role in the EU
capital markets and is fully committee to the integration of
those markets. We look forward to working with the EU, the
administration and this subcommittee in achieving a European
capital market that is transparent, open and efficient.
Thank you. Madam Chair, please allow me one personal
comment. I also want to take this opportunity to thank the
members of the committee on the fine work that you have done on
the Basel II capital accords. The public discussion of these
issues in both the House and the Senate has had a tangible
impact that has moved the Basel Committee to a place where a
large portion of the overwhelming problems we faced 18 months
ago have been resolved. The House Financial Services Committee
was the first to publicly discuss those issues. My firm and the
industry are appreciative of your efforts.
[The prepared statement of Richard Thornburgh can be found
on page 57 in the appendix.]
Chairwoman Biggert. Thank you very much. That is nice to
hear.
Our next witness is Mr. Oldshue.
STATEMENT OF PAUL OLDSHUE, IMMEDIATE PAST PRESIDENT, BANKERS'
ASSOCIATION FOR FINANCE AND TRADE
Mr. Oldshue. Chairman Biggert, Ranking Member Maloney and
members of the committee, I am pleased to be with you today to
discuss the banking industry's views regarding the financial
markets dialogue between the United States and the European
Union. Regulation of financial products and services imposes
additional costs on financial firms and affects their
customers' cost of capital.
Unnecessary regulatory conflict, inconsistency and
duplication can only add to those costs, and those of us in the
financial services business strongly support the efforts of
U.S. and EU officials to limit regulatory dysfunction. We are
grateful for this hearing and for the full committee's earlier
hearing on May 13 to examine this important subject.
I am testifying today as the immediate past president of
BAFT, the Bankers' Association for Finance and Trade. BAFT is
an affiliate of the American Bankers Association and its
membership includes most of the major American banks that are
active in international banking, and also many of the major
international banks chartered outside of the United States.
My employer, U.S. Bancorp is the seventh-largest financial
services holding company in the United States. Our principal
bank subsidiary, U.S. Bank, operates in 24 states throughout
the Midwest and West. We maintain correspondent relationships
with more than 2,000 banks in 125 countries.
The United States and the European Union have a close
economic relationship, and close cooperation should be good for
both of us. There is no doubt that the US-EU financial markets
dialogue has been a constructive exercise and that it has
accomplished a great deal simply by establishing new lines of
communication. Moreover, since the dialogue began in March
2002, discussions between U.S. government and EU officials have
contributed to resolution of a number of important issues
arising in the context of the EU's financial services action
plan.
We think that this is a good start. We believe that the
value of the dialogue will increase as it continues and as
relationships deepen and issues are added. But more can be
done, and we think the dialogue can be improved in several
respects.
We feel that the dialogue should be more transparent. It
would be a big improvement if U.S. participants made a greater
effort to consult with U.S. banks, securities firms and other
financial firms early in the process and on an ongoing basis.
This would give us a chance to provide our views as to what
should be on the agenda and what the priorities should be, in
our view.
We also think that participation in the dialogue should be
broadened. The dialogue should include financial regulators and
also members of Congress and staff, particularly those who are
on this committee. We think much could be gained if the members
of Congress and their staffs engaged in a continuing dialogue
with appropriate officials in the EU, again with input from the
private sector.
We would also like to recommend that the U.S. Treasury
Department consider putting more of its people on the ground in
Europe. In my experience, there is nothing like local knowledge
in order to anticipate, understand and react to new
developments in particular markets. Treasury should seriously
consider adding staff in various locations in Europe,
particularly in Brussels.
I would like to mention several specific issues that
concern the banking industry that are or should be on the
dialogue's agenda.
They include implementation of Basel II. Bankers are
concerned that there could be significant differences in the
application of Basel II from country to country, and that these
differences could impede banking across national borders. To
address our concerns, we recommend that the US-EU financial
markets dialogue include a discussion of how to coordinate the
application of the new capital standards.
We are also concerned about convergence between the U.S.
GAAP and international accounting standards. In this respect,
we recommend that the dialogue focus on three particular areas:
first, lack of transparency in the IASB's rulemaking process;
secondly, the potential shortcomings of principles-based
accounting, which can become inconsistent if the principles are
interpreted differently by those who apply them; and last,
weighing the costs and benefits of convergence of existing
accounting rules.
Another issue that merits attention is privacy and data
protection. Specifically, we are concerned about the potential
impact on U.S. banks and other financial institutions arising
out of the European Union's directive on data protection. A
stand-still agreement between the EU and the United States
expired on July 1, 2001, leaving U.S. banks and other financial
firms vulnerable to action by government authorities in the EU
countries. EU restrictions on information-sharing across
corporate affiliates would affect U.S. financial firms more
than their European counterparts because financial
organizations in the United States tend to have more separately
incorporated entities than the European universal bank model.
We are eager for the EU to acknowledge that the Gramm-Leach-
Bliley Act and other financial privacy laws such as the
recently enacted Fair and Accurate Credit Transactions Act
provide adequate privacy protection for personal financial
information.
In conclusion, we strongly support the US-EU financial
markets dialogue, but also believe it can be improved in
various respects. We also have specific issues that we would
like the dialogue to address. We are very encouraged by the
progress that has been made so far, and enthusiastic about the
potential that the future holds.
Thank you very much for holding this important hearing and
allowing us to participate and provide our input. Thanks.
[The prepared statement of Paul Oldshue can be found on
page 28 in the appendix.]
Chairwoman Biggert. Thank you very much.
Professor Scott, you are recognized for 5 minutes.
STATEMENT OF HAL SCOTT, PROFESSOR OF INTERNATIONAL FINANCIAL
SYSTEMS, HARVARD LAW SCHOOL
Mr. Scott. Distinguished members of the committee, thank
you for permitting me to testify today on matters relating to
the informal US-EU financial markets regulatory dialogue. I
will be reading from a statement prepared by myself and Kenneth
Dam.
Let me summarize our views. While the dialogue has made a
significant contribution to better relations with the EU, it
has failed to resolve the most important issue confronting the
two markets: whether or not the U.S., like the EU, will accept
international accounting standards. We also believe the
dialogue should be more proactive in removing obstacles to the
development of what we call an efficient trans-Atlantic market
in financial services. Its work should not be limited to
firefighting.
Finally, we believe that the dialogue needs to include
additional government participants and to become more
transparent. The most successful result of the dialogue has
been to temper the application of Sarbanes-Oxley to foreign
firms, some of which had great difficulty in simultaneously
complying with the new Act and their own laws. The SEC sought
to accommodate these firms by adopting a flexible approach to
the Act's requirements.
The dialogue had no formal role in this regulatory process.
However, we believe the presence of the Treasury's broad
perspective on US-EU relations and its deep concern with the
health and efficiency of capital markets may have contributed
to the willingness of the SEC to react sympathetically to EU
concerns. In this sense, the dialogue is as much an internal
process among U.S. regulators as it is an external process with
the EU.
The most noteworthy shortcoming of the dialogue is its
failure to resolve a potential crisis that may be precipitated
by the EU's anticipated adoption of international accounting
standards in 2005. Currently under SEC regulations, foreign
firms may only issue securities or have their securities traded
in the U.S. public markets if such firms either state their
accounts in or reconcile their accounts to U.S. GAAP.
Absent a change in SEC policy, EU firms which state their
accounts in IAS will be unable to access the U.S. public
market. This could lead the EU to take the position that U.S.
firms could no longer use U.S. GAAP in the EU market. This
could have a severe effect on U.S. firms issuing capital abroad
and further increase the segmentation between the U.S. and EU
markets. This is an important issue that must be resolved.
We believe the dialogue should be broadened beyond solving
particular problems, to embracing the positive agenda of
creating a single trans-Atlantic market in financial services.
The goal of this effort would be to remove barriers to cross-
border transactions, particularly in capital markets where
significant barriers remain. The EU is now in the process
itself of adopting a common prospectus and a common approach to
continuous disclosure through the implementation of two new
directives. Further, it has created a new body, the Committee
of European Securities Regulators, CESR, to facilitate these
efforts. The SEC should start working with CESR to harmonize
disclosure rules so that the two sides could develop a common
trans-Atlantic prospectus and ongoing disclosure rules.
There is also much to be done in creating common
distribution rules and a coordinated approach to market
structure. Finally, there is also a need for further thinking
on ways to resolve enforcement differences between the two
sides of the Atlantic. A joint SEC-CESR committee could also
work on these matters.
In our view, an effective trans-Atlantic market in
financial services would be best achieved through common
regulatory rules and enforcement throughout the U.S. and EU. We
do not believe the equivalence alternative offered by the EU is
workable for rules pertaining to the offering of securities.
The equivalence approach would require the U.S. to allow EU
firms to offer securities in the U.S. under EU rules, which
include the rules of various member states as well as the EU's
own rules. This home country approach for securities offerings
has not even worked within the EU, and is in the process of
being replaced by harmonized rules in the form of the common
prospectus.
We conclude with a few thoughts on process. The U.S. and EU
should consider including the Commodities Futures Trading
Commission, CFTC, and state insurance commissioners on the U.S.
side. The EU also needs to have some member state
representation. While EU financial regulation is significant,
many important areas, like enforcement, are still left entirely
to member states. We should also consider whether this should
be a US-EU dialogue or a U.S.-Europe dialogue. If it is the
latter, states like Switzerland and even Russia may need to be
included in some fashion.
Thank you very much.
[The prepared statement of Hal Scott can be found on page
45 in the appendix.]
Chairwoman Biggert. Thank you very much.
We will now proceed to questions. I will begin.
The first question that I would like to ask is, Mr. Oldshue
and maybe the other witnesses would like to give some answers
on this also. Mr. Oldshue, I think that you present good
arguments for increased transparency and participation among
policymakers in Europe. However, I understand that a great deal
of informal consultation and information exchanges already
occur between members of the private sector and participants in
the US-EU regulatory dialogue. Are you suggesting that a more
formal structure is needed for these consultations?
Mr. Oldshue. I do not know that a more formal structure is
needed. There have been conversations. There has been dialogue.
I think from our perspective it has taken too much work to stay
informed about the process. So an encouragement of continued
openness and transparency and open dialogue and proactive
dialogue in anticipation of problems is really what we are
suggesting here.
Chairwoman Biggert. Concerning the transparency, what is
the likelihood of the EU developing what we have here with the
public comment period and publishing in the Federal Register?
How important is the difference in taking public comment?
Mr. Oldshue. I think we are really not looking for there to
be an identical process to what we have here. I think what we
are looking for is an encouragement from your chair and from
comparable chairs in Europe of an openness in dialogue in
conversation on these points.
Chairwoman Biggert. I think you indicated that the US-EU
regulatory dialogue should squarely address the privacy issues
regarding the sharing of personal information within affiliates
in Europe, especially after the passage of the FACT Act here.
Mr. Oldshue. Right.
Chairwoman Biggert. What reaction have you received from
the U.S. and European regulators?
Mr. Oldshue. This is a fairly thorny issue. It really boils
down to very different philosophies on how our financial
organizations are structured and set up. We tend to conduct
financial activities through separate and distinct subsidiaries
of our holding companies that under U.S. law have restrictions
on how they can share financial information from one to the
other. European banks tend to be universal banks with
everything under the same umbrella. The sharing of information
is not similarly restricted or discouraged.
The difficulty a U.S. firm has in competing in that
environment is that clearly as you are marketing financial
products, it is a significant impediment to not be able to use
information gathered in one part of the firm to market your
products in another. This is not an issue that has an easy
solution. I think from a regulatory perspective, it is going to
boil down to allowing U.S. firms to share information across
corporate entities so that they function in the same way as a
European bank within its own corporate structure.
Chairwoman Biggert. Professor Scott, would you have
anything to add to that?
Mr. Scott. I do not see the need to make the dialogue more
formal than it is. But I think that we need to know more about
what it is doing. I think that, as Paul has said, and it is my
understanding that the U.S. participants widely consult the
private sector before determining their positions, and that is
good. I do not think that needs to be formalized, but I do
think that it would be useful to have some regular reports, at
least to the Congress, about what is going on in this dialogue.
There is no formal process for reporting results, basic
information, what are the issues on the table, what progress
have we reached with respect to these issues. I think that that
kind of transparency would be good to have, that kind of
enhanced transparency.
Chairwoman Biggert. Thank you.
Mr. Thornburgh?
Mr. Thornburgh. I guess there are really two parts of
Paul's recommendation. I think one is that our own regulatory
agencies and administrative agencies should reach out to our
collective industry to seek input, as opposed to us trying to
find the shadows in the closet. The second is the Lamfalussy
process, which I think has made some good progress in Europe
once it was put in place, which does call for more
consultation. I think the UK regulatory law-setting process
also has a very good consultation process which is equivalent
to the U.S. But I think we would encourage our own agencies to
seek out our input and we would complement the Lamfalussy
process.
Chairwoman Biggert. Okay, thank you. My time has expired.
The Ranking Member, Mrs. Maloney from New York, is
recognized for 5 minutes.
Mrs. Maloney. Thank you.
I believe it was Richard Thornburgh who said in his opening
statement that Brussels and London are important financial
centers. I would like to add that we want to keep the United
States as an important financial center. I am concerned about
any rules, regulations, accords that in any way limit the
ability for American business to compete and win in the world
economy.
I am proud to have authored a bill that required Basel II
to come back to the Congress for approval. It did not pass. It
probably will not pass, but it got everybody's attention. We
had several hearings on this important accord that is going
forward. Some members that have testified before us believe
that it will apply not just to our large international banks,
but once you start a standard it starts applying to everyone.
There is some concern from some of our financial institutions
and businesses that the capital requirements will be stronger
and harder on America than it will internationally.
Also, our regulators are very tough and they are very
experienced and they are very good. Usually, it is a crook,
when you have these scandals, it is someone who is just not
following the regulations; it was an enforcement issue more
than a regulation. So my point is, I am very concerned about
Basel II. I think our regulators will enforce it. I am not so
sure that Europeans and other countries will enforce it. We are
going to be having a hearing, I think it is next week, on Basel
II? Or is it Tuesday on Basel II? I hope that the leadership,
the majority party, will invite the two gentlemen who made
strong statements about their concerns to come back and testify
at that hearing, too, so we can get their input.
I just would like to hear the comments from the industry
representatives on Basel II and your concerns. Do you think it
is fair? Do you think the capital requirements are going to be
tougher on American firms? Your comments on that. The
enforcement issue, it will be enforced on Americans. Will it be
enforced in Europe. And also, I think your comments are very
well taken that we need professionals in Brussels, in London,
in the EU, really advancing and being part of the discussion so
that we are in on the ground.
Thank you for your testimony and what you do for the
country. On Basel II?
Mr. Thornburgh. If I may make three comments, I think the
first comment is it is very important that the FSA representing
the European Community recognize the SEC as an equivalent
regulator. I think the SEC's CSE proposal, which is put out for
comment, clearly establishes an equivalent regulator and we
have to keep our eyes on the fact that the FSA needs to make
that determination this month in order for our firms to be able
to comply with the capital directive.
Two is our concern would be on the whole area of
operational risk. It has yet to be implemented. The allocation
of operational risk among countries and subsidiaries will be a
very tricky issue. That then leads to the whole home host issue
in making sure that there is appropriate guidance so that the
home regulator would have predominance over the host regulator.
I think, Paul, you have some more specific comments?
Mr. Oldshue. I would share your concern, Congresswoman,
about the difficulties ensuring that the regulation is even and
fair and consistent across borders. We do have capital
standards in the U.S. that in many cases are more stringent
than would be called for under Basel II. As Basel regulations
are applied and regulated across borders, there is a risk that
the standards could be different from country to country and
bank to bank, and put our institutions at a competitive
disadvantage.
We have recommended that the principle of lead supervision
by a home country regulator be an objective. It would require
that we defer to home country regulators, but I think it is a
way of ensuring that information is shared across borders, that
there is dialogue between the regulators, that we make every
effort possible so possible that the regulations are the same
and are applied consistently. This is the key issue from our
perspective.
Mrs. Maloney. I have asked this question at several
hearings, and I have never gotten an answer that answers what I
am really concerned about. Who is really looking out for
American interests? In a sense, I do not think you really
understand unless you have done the job yourself, no matter how
good a regulator is. They do not know what it is like to be a
major institution that is supplying capital in this country and
across the world. Who is there to make sure that our interests
are taken care of and that what you two are saying actually
happens? Because the people there are not the real people in
the field that understand what it is really like. Do you
understand what I am saying?
Mr. Oldshue. Exactly. The Federal Reserve is the point
agency.
Mrs. Maloney. I know who is the point agency, but I think
that they do not have the experience that someone like yourself
has.
Mr. Oldshue. I think it is an issue. Our concern is that
there be constructive and continuing and regular contact on
these points. I think there is dialogue going on. Our concern
is not so much that the Federal Reserve does not have an
understanding of what our concerns are. Are concerns are really
across borders and making sure that the things they do not
really have direct control over are negotiated and implemented
so that the various governments in the EU and other parts of
the world are applying standards in the same kind of way.
I think they understand. It is a very thorny political
issue.
Mrs. Maloney. But how do we make sure that that happens?
Mr. Oldshue. I think it is cheerleading from your chair; it
is an awareness that it is a significant issue. It is an
awareness that as difficulties arise in implementing----
Mrs. Maloney. How do you structurally work it into the
format of the whole program?
Mr. Oldshue. I think it ends up needing to be an agreement
between the regulatory authorities in the major financial
markets. I do not know that you can legislate it.
Chairwoman Biggert. The gentlelady's time has expired.
The gentleman from Florida, Mr. Feeney, is recognized for 5
minutes.
Mr. Feeney. Thank you, Madam Chair. I appreciate the
testimony from the witnesses.
Mr. Scott, this is a hearing primarily about U.S. and
European Union financial regulatory issues. You mentioned
Switzerland and Russia for example as being European countries
that are not currently part of the EU. Can you give us some
perspective about our relationship with the EU and trying to
break down some of the regulatory burdens and hurdles in terms
of the global capitalization markets. Can you talk to us a
little bit, even though this is a hearing about the EU
relationships, about the Far East, for example, and the Mideast
and other places where we have a significant amount and growing
percentage of our commercial market interchange.
Mr. Scott. You have a number of questions there. Let me
start with the last one. Actually, I just got back from a
symposium that I helped organize with Chinese counterparts on
U.S.-Chinese financial relations. It is a major place in Asia,
and I have done similar symposiums with Japan.
Interestingly, this term ``dialogue'' and ``financial
markets dialogue'' has gotten over to China. This committee may
be aware that the Secretary of Treasury has appointed a special
emissary, I think unprecedented, to China, Ambassador Speltz,
who also represents us with the Asian Development Bank. He is
engaged in a financial markets dialogue with Chinese
counterparts on solving specific issues in China.
So I think, while we are focused here on the US-EU, the
Congressman is quite right to point attention to the importance
of the Far East, China and Japan in particular. I think that
the Treasury has been taking a productive lead in trying to
resolve issues in those areas in which there are a number.
In terms of the question of the EU and Europe, the EU
itself, Switzerland is obviously a major factor in Europe, as
Mr. Thornburgh can readily attest.
Mr. Feeny. Especially when it comes to markets and
transparency, right?
Mr. Scott. Yet, Switzerland is not part of the EU. The EU
itself has had a number of outstanding issues with Switzerland,
trying to resolve issues between them. Switzerland is an
important part of the world's capital markets, an important
part of the banking system, particularly in private banking.
So I think it would at least be worthwhile thinking about
whether some kind of inclusion of the non-EU countries like
Switzerland and Russia, which is going to be and is becoming a
factor in world capital markets, need to be folded into this.
Now, of course, then that raises the issue as to why are we
doing this on a regional basis at all; why isn't this a
worldwide effort; why US-EU; why not, U.S.-world.
I think that in the end, that is what we will try to
achieve. But each region has its set of special issues. So I
actually think that this kind of regional approach makes a lot
of sense, but all the participants have to keep their eye on
the bigger picture, which is the world capital market, and I
believe they do. I think the people that we have participating
from the U.S. side clearly are not just knowledgeable about
Europe, because the Federal Reserve Board and the Treasury and
the SEC are also concerned about the rest of the areas of the
world.
Mr. Feeny. Thank you.
Another thing that you said that really interested me is
that you suggested or implied there were some problems with
what you called the ``equivalence'' approach where we sort of
just acknowledge a home country's rules and regulations. But it
seems to me, particularly a professor at the University of
Chicago Law School, may see some advantages to having
regulators compete. Maybe you can touch on how we get the best
of both worlds so we have standards, but we also are not
adopting the most onerous and rigorous and anti-competitive
standards available. Because often that is the way we descend
as governments and regulators.
Mr. Scott. I should point out that I am the Harvard part of
this team.
[Laughter.]
But lest you despair, I went to the University of Chicago
Law School.
Mr. Feeny. Very good.
Mr. Scott. So I think Ken Dam and myself would share a
common perspective, also being part of the Shadow Financial
Regulatory Committee at the AEI. We are not generally in favor
of more and more regulation and think markets should have the
major role in determining what financial institutions do. That
being said, I believe that in the area of securities offerings
that this idea of regulatory competition is kind of
theoretically attractive, but it just does not work.
Most financial firms would tell you that they would like
common rules across all borders to do business. It is highly
efficient. The question then becomes, well, if we have
harmonized rules, where is the competition? How does the system
change? I believe that there are always going to be ideas in
competition. You do not need regulation in competition. As long
as ideas are in competition, regulations can be changed.
Both sides of the Atlantic can continue to make very good
suggestions about how those harmonized rules should evolve, but
I think that the efficiency of our trans-Atlantic securities
markets would be greatly aided by a common set of rules.
Chairwoman Biggert. Thank you.
The gentleman from Alabama, Mr. Bachus, is recognized for 5
minutes.
Mr. Bachus. I thank the Chair.
Mr. Thornburgh, you have expressed a desire for a
structured program of interaction between U.S. congressional
members and their staffs, and their EU counterparts. What
particular benefit do you think that type of exchange would
provide that the current exchange of information does not?
Mr. Thornburgh. The benefit that that kind of exchange
acknowledges or allows for is a better understanding of why
certain rules and regulations are being proposed, so that the
rhetoric can be removed when people get caught off-guard. We
clearly made some great compromises on Sarbanes-Oxley and the
PCAOB, but if we would have had better discussions before those
items came to the forefront, they could have been resolved with
a lot less emotion and heat in the media and the press and in
the marketplace, which I think can create some inefficiencies
in competition and in markets.
Mr. Bachus. Would you explain in detail your suggestion, I
think you made a request for the placement of a Treasury
financial attache in Brussels. How would that benefit the
financial services industry here in the United States?
Mr. Thornburgh. Thank you for the opportunity to address
that question. I take this really from the perspective of the
role that I have played. I moved to Switzerland in the late
1990s to become the CFO of a European company. My predecessor
had lived in London and commuted between London and Zurich to
perform that function. What I learned from my personal
experiences is to be an effective participant in shaping public
policy and having an impact, one needs to live in the
community. I think that the sign that the U.S. would make by
moving the attache from Frankfurt to Brussels would acknowledge
that Brussels is the heart of the EU legislative community. By
having that permanent presence there, it shows a commitment and
involvement in the community.
More importantly, it supports U.S. industry, not just the
financial services sector, but U.S. industry. I think that
ability to be around for the informal conversations which you
all recognize much better than I do, would have a major impact
in furthering the agenda for our economy and our companies.
Mr. Bachus. Okay. You proposed in your statement a U.S.
action plan. Would you explain why that is important and how we
would formulate such a plan, what the mechanism would be for
coming up with a plan?
Mr. Thornburgh. The action plan really has four components.
I think the first, as we have just talked about, is the
Brussels attache. The second, which we have not really talked
about, is Treasury coordination with the State Department.
There are 25 EU member states and the new member states will
have a major impact on how votes and decisions are made in the
EU community. We have found out in the past in the financial
services directive that although rules and regulations were
proposed to the Parliament, they were voted down by a number of
member states's ministries of finance.
So I think that ability to use the diplomatic corps to help
us watch out for ourselves is a good attribute and addition to
the treasury's coordination. We have talked about Congress and
Parliament, and of course the last component is getting more
communication, dialogue and action out of the SEC and CESR,
which the professor I think has adequately addressed.
I would add, though, to the question from the Congressman
from Florida, that I think accounting equivalency is important.
We may not need equivalency in laws and maybe that is the wrong
way to go, but I think accounting equivalency is extremely
important to attracting foreign issuers to our markets.
Mr. Bachus. Okay. What were some of the lessons learned
from the ISD debate on market structure? There were some
problems there that the private sector had. How do you think
that could be resolved more successfully with this United
States-EU dialogue?
Mr. Thornburgh. Actually, the excellent lesson there was in
fact that there was a group of southern core states of the
European Union which took a different position from the more
developed capital market states of the UK and Germany. What we
found there is had we been using the State Department to be
working on some of these issues, better progress would have
been made, especially as it related to some protectionist
aspects of the proposal, which really preserved the local stock
exchanges in the southern states as opposed to helping create a
more global European stock exchange or marketplace.
Mr. Bachus. Okay. I see my time is up. I thank you.
Chairwoman Biggert. Thank you very much. We will start
another round. Just briefly, I assume, Mr. Thornburgh, that the
EU has assigned someone to our capital, an attache?
Mr. Thornburgh. Yes.
Chairwoman Biggert. Thank you.
Professor Scott, do you believe that financial regulators
in the U.S. and Europe currently have the legal authority to
undertake the sharing of information and responsibility
suggested not only by your testimony today, but also by some of
the government witnesses at last month's committee hearing on
the issue.
Mr. Scott. I think that most of the measures that I am
focused on have to do with capital markets. The question would
then be whether the SEC, which is our primary regulator, would
have the legal authority to enter into agreements.
Chairwoman Biggert. It seems like each of the regulators's
authority is based on laws enacted by their physical
jurisdiction. So can they delegate or converge standards
without seeking additional authority from the legislatures of
the various countries?
Mr. Scott. Your focus is on the EU side as opposed to our
side?
Chairwoman Biggert. Really on our side, too.
Mr. Scott. I have not looked into this in any detail, so I
preface my remarks with that, but I would think that the SEC
could not basically enter into any agreements, changing our
basic approach to securities regulation, which might be
required in an effort to harmonize the rules on both sides of
the Atlantic, without authority from Congress.
So in that sense, the SEC could certainly entertain
discussions, but at the end of the day if our securities
regulations were to change in some ways that were different
from what we currently have in our laws, there would be a need
for additional congressional authority.
On the EU side, it is complicated by the fact that there is
a split of authority between the EU and the member states with
respect to a number of issues. I think I have already
testified, for example, that enforcement is left almost
entirely to member states in the EU. So the EU cannot really
negotiate about enforcement without making some changes in the
EU with respect to their authority to, at the European level,
deal with enforcement. As I am sure you can appreciate,
enforcement is what this is all about at the end of the day. We
have already discussed that issue with respect to Basel. The
same will be true with respect to securities regulation.
So I do not think that the EU is particularly well set up
today to implement as opposed to discussing agreements that
might be reached between the U.S. and EU. So some changes in
legislative authority would be required on their side as well.
Chairwoman Biggert. Okay, thank you.
In today's testimony, we have heard recommendations that
the US-EU regulatory dialogue be expanded to include the CFTC
and members of Congress and the private sector. Would such an
expansion make such a forum unwieldy and unable to reach
decisions, if it gets too big?
Mr. Scott. At the risk of being unpopular here, I do not
think I was advocating that the Congress participate.
[Laughter.]
Chairwoman Biggert. Okay. That is all right. We have enough
work to do already.
Mr. Scott. I certainly think that the Congress should be
kept fully informed and there should be regular reporting to
the Congress, but I find it hard to envision how the Congress
could actively be involved in these discussions in meetings. I
just do not think that is particularly workable, but I think
that the Congress needs to be fully informed.
I think it is very important that the insurance sector in
particular, which is not represented here on this panel, get
some inclusion in this process because I think that there are
beginning to be a number of EU initiatives in the insurance
sector which are already affecting U.S. insurance firms, and
yet insurance regulators do not have any standing. As you know,
this is a matter of state regulation, but I think we could try
to find some ways, either through the trade associations or
supervisors association of the insurance regulators, to get
some representation on insurance. So I think that would be a
very important expansion.
CFTC, I think, it also seems to me that they should be
included. They are on the President's Working Group on
Financial Markets, which is our internal attempt to coordinate
regulatory activity. That being the case, I see no reason why
they should be omitted from the informal dialogue with the EU.
Chairwoman Biggert. Okay, thank you.
Mr. Thornburgh, I believe in your testimony that you seek
convergence across the Atlantic regarding anti-money laundering
strategies, and that the trans-Atlantic business dialogue of
which you are a member is making a similar recommendation.
Could you provide us with a better sense of what kind of
convergence you are recommending and how it could be achieved?
Mr. Thornburgh. When we talk about convergence, I think we
are talking about common rules and reporting requirements of
those people who act as financial intermediaries. One of the
complications, I understand, in the current setup is the
inability to rely on a financial intermediary in another
country to make a representation.
For example, at Credit Suisse First Boston we have to deal
with the Swiss money laundering rules, the EU money laundering
rules, and the PATRIOT Act. We deal with a client across
borders so we may deal with a hedge fund based in Bermuda who
wants to do a transaction with us in Switzerland; wants to do a
transaction with us in the UK; and do a similar transaction
with us in the U.S. There may be three legs of that
transaction, so it is one transaction with three different
booking centers.
The ability to allow us to rely on our own representations
to ourselves is very important. I know from personal experience
in a project we had to do for the FSA in the UK, we spent
roughly $50 million to adhere to some standards in the UK, and
after we did it the FSA told us, you know, we know realize it
is too expensive; we will not make any of your other
competitors go through the same process.
So we are all for the goal of catching the terrorists,
catching the drug lords, but there should be some practical
understanding of how institutional companies, dealing with
institutions, might be able to ease up the rules to get to the
same result. Hopefully, that is enlightening.
Chairwoman Biggert. Thank you very much. My time has
expired. The gentlewoman from New York, Ms. Maloney.
Mrs. Maloney. Professor Scott, will you please send my
regards to Larry Summers?
Mr. Scott. I will do so.
Mrs. Maloney. We miss him. Okay.
You mentioned that the insurance industry in America may be
affected somewhat by EU initiatives. Could you forward to the
committee or speak about examples of certain initiatives that
are impacting on the insurance business?
Mr. Scott. Yes. The EU has taken a European-wide initiative
about regulation of insurance companies in general, and
particularly with respect to capital adequacy. This is both at
the level of insurance firms, as well as reinsurance firms. The
question looming on the horizon is similar to the one that is
raised by the conglomerates directive, which is well, if they
are requiring all these kinds of controls on their own
insurance firms, under what conditions are they going to allow
American insurance firms to come into the EU. Are they going to
require that there be some kind of equivalent regulation of
insurance firms by us?
So I think those broad terms are the kind of issues that
are going to be confronting the insurance industry in the near
future, or are already confronting them.
Mrs. Maloney. You mentioned how helpful you believe
Secretary Snow's initiative of a special financial envoy to
China is, which basically is the same idea of Mr. Thornburgh to
have a special envoy in Brussels. Where else do you think we
should have special envoys, ideally? We are in a world
community and a world market, and the points that both of you
raised are important.
Mr. Scott. I actually think this China initiative goes
beyond what Mr. Thornburgh is suggesting.
Mrs. Maloney. He was just Brussels.
Mr. Scott. But he is I think asking for a Treasury
representative in the embassy in Brussels.
Mrs. Maloney. Yes.
Mr. Scott. I think what we have done in China goes a step
beyond that. The Secretary of the Treasury himself has an
emissary from the Treasury Department there, not part of the
State Department's operation in China, to give a direct link
between Mr. Speltz who is his emissary and the Secretary with
respect to ongoing negotiations with China on loosening up
capital controls or preparing for more flexible exchange rates
and things like that. I think that that signifies the special
importance that the Treasury attaches to ongoing issues with
China at the moment.
I think one could ask, what is more important in the big
picture? Is Europe less important than China? Why should China
have this kind of special status? I think that it is probably
because China is in a more delicate stage. In our relationships
with China, we are building a series of relationships there. We
already have these relationships with the EU. I do not think I
could recommend a proliferation of special emissaries.
Mrs. Maloney. But you said a regional approach would be
useful.
Mr. Scott. Right. I would support Mr. Thornburgh's idea for
representation in the Brussels embassy of a Treasury attache.
Mr. Thornburgh. May I make a comment?
Mrs. Maloney. Sure.
Mr. Thornburgh. We did meet with Under Secretary of
Treasury Taylor at the Treasury. What we found out is that
there are two budgets. This is classic. There is a budget for
the permanent representatives which have gone down from 230
employees to 165, and then there is the budget for assistance
slots which allow for special assistants in special countries,
and that actually gets a little bit of the State Department
foreign aid money. So what we may have is the classic problem
of the pot going down on one side and going up on the other
side, although it is still the same taxpayers's pool of dollars
and perhaps we could be a little more efficient in how that
money gets spent.
Mrs. Maloney. You testified you felt that it was very
important to the financial interests of America to have
representations in Brussels and possibly other countries to be
on the ground with the information. I am not going to suggest
that.
I want to really ask you about capital. You testified, Mr.
Thornburgh, that we are thriving very much on foreigners buying
American securities and investing in America. I am concerned,
we just 2 weeks ago, maybe it was 3 weeks ago, raised the debt
ceiling an additional $2 trillion. The deficit now is galloping
towards $600 billion or $500 billion, the numbers are huge. At
what point do you think foreigners may decide they do not want
to invest in America because of the huge debt that we have? We
have always been in a stronger financial position than foreign
countries, but now they may be concerned about our mounting
debt.
Do you see that, any ramifications from that? Is that an
issue or it is a non-issue? I am concerned about it for my
grandchildren and my children, but I am also concerned about
how far can we go in this direction before other countries may
not want to invest in American securities and other
investments. Are you hearing anything in your world community
in which you interact with 35 countries every day, any concern
about the growing debt of America for our financial strength?
Mr. Thornburgh. That is a pretty loaded question. Luckily,
I am not Alan Greenspan. I think the dollar will continue to be
a reserve currency around the world. What we need to worry
about, and the implication of your statement, which is a very
serious question, is one about the cost of capital and about
the value of the dollar. So the implications really come out to
the strength of the dollar and what will the dollar buy 5 years
from now versus what goods and services a dollar can buy today,
and what will the cost of capital be for U.S. corporations and
those corporations raising funds in dollars.
So I think the concerns that we would hear about the
deficit really speak to the value of the dollar and the level
of interest rates. I do not personally worry about the dollar
losing its reserve currency status, although we should
acknowledge that the EU now is the second-largest economy in
the world, and a lot of us 10 years ago did not think that
countries would give up their local currency to exchange it for
a common currency, and that of course has happened.
Mrs. Maloney. Okay. My time has expired.
Chairwoman Biggert. Thank you.
Mr. Bachus?
Mr. Bachus. Thank you.
Mr. Oldshue, I appreciate your endorsing this idea of a
Treasury attache office in Brussels to advocate U.S. interests,
and it may be that Congress needs to fund such an office. I
think Mr. Thornburgh mentioned maybe relocating the attaches
office in Frankfurt, which should not cost additional funds.
Let me ask this about the financial markets dialogue. There
is a broad array of issues being discussed, but I ask all three
of you gentlemen, are there other issues that ought to be
included that are not? I will just start with Mr. Thornburgh
and go down the line. Maybe also while you are answering that,
any issues that should be included, what do you consider the
most pressing issues?
Mr. Thornburgh. I think for me the most pressing issue is
making sure that the EU acknowledges U.S. GAAP as an equivalent
accounting standard; two, that under the financial services
conglomerate, that the SEC is acknowledged as an equivalent
supervisor, because although Basel is not fully implemented
until 2008, for capital regime purposes in the EU a new law
comes into place in 2005, where equivalency of the home
supervisor is very important. That impacts our U.S. securities
firms doing business overseas.
An added issue that we would add to the list on the
dialogue would be issues around the European clearance and
settlement system. I think there have been recent articles that
acknowledge that the cost of setting a securities transaction
in Europe is roughly 97 cents and cross-border 35 cents,
whereas in the U.S. that is 10 cents. So I think there are some
inefficiencies in the European rules and regulations around
clearance and settlement that do impact the cost of investing
in the EU.
Mr. Bachus. Okay. Mr. Oldshue?
Mr. Oldshue. I think I would reiterate the three issues
that are our principal concerns. Certainly, the fair and
consistent application of capital standards across foreign
borders is one of three major issues for us. Secondly, and this
goes beyond the financial industry, ensuring that convergence
of accounting principles between Europe and the United States
is managed in an intelligent, logical and useful way. Lastly,
it is ensuring that the sometimes conflicting regulations
governing the sharing of financial information, within our very
different corporate structures in Europe and the U.S. are done
in a way that is fair and consistent across borders. Those
would be our three major issues.
Mr. Bachus. Okay. Mr. Scott?
Mr. Scott. I think the issue of GAAP equivalence, as Mr.
Thornburgh mentioned, is very important, but recognize that
this is a two-way street. Unless the U.S. allows foreign firms
to come in here, especially European firms under IAS. It seems
to me unlikely the Europeans are going to allow our firms in
the future to go in there under U.S. GAAP. This is an issue
that is right around the corner. It is coming up in 2005. As I
have testified, I do not think that this point, and this is the
most important issue between U.S. and Europe today, and it has
not been resolved by this dialogue and needs to be resolved. I
think anything Congress can do to help this get resolved would
be a good idea.
In terms of adding things to the process, my testimony has
focused on the fact that we need to be more proactive and not
just react against particular problems. I would set the
dialogue's agenda to create a trans-Atlantic market in
financial services. When you look at it in that respect, you
are not just fighting problems. You are saying what needs to be
done in order to make this happen.
For instance, I think if you look at that as an objective,
you start focusing on common rules for the distribution of
securities on both sides of the border, which is not really an
active point today in the dialogue. Accounting standards are,
but beyond accounting standards, just general questions of what
elements of disclosure must be made in a prospectus; how
securities need to be distributed; how we enforce our rules
with respect to distribution of securities.
All these issues would come up if one had an objective of
establishing a trans-Atlantic market in financial services.
Mr. Bachus. Can I have one follow-up question? You have all
mentioned accounting standards, international accounting
standards. Within that is a single set of international
accounting standards. That brings to mind the IASB 39, Italy,
Spain, France, and Belgium have all objected to. I would be
interested in hearing from you about their reported objections
to IASB 39. I think that is right.
Mr. Scott. We had quite a to-do when we were dealing with
the same kind of issue in the U.S. In fact, many of our banks
had problems with this. Indeed the Chairman of the Federal
Reserve was not sure that he liked the idea of constantly
marking the securities of financial institutions because it
introduced volatility. So in a sense, it is no surprise that
this same issue is being actively debated there.
It may turn out that they do not accept IAS 39. I think if
that occurs, that does not mean the end of IAS in the U.S.,
even though that would be a key missing part. I think what the
U.S. could then do is say, okay, you can come in here under
IAS, but you have to put in a 39 as well. That is, if we have
some important differences between IAS and U.S. GAAP in 2005, I
do not think we need to say, oh, we cannot have IAS. We can
have IAS with some additions or some modifications. I think we
need to start thinking in that direction.
Mr. Bachus. Okay. Mr. Thornburgh, would you like to comment
on the IASB 39 and some of the Europeans' objections to that?
Mr. Thornburgh. Fortunately, Congressman Bachus, I might be
viewed as the fool at Credit Suisse who moved Credit Suisse to
U.S. GAAP. I started that project when I was the CFO in 1998.
It took us until 2003 to actually be able to move from Swiss
accounting standards to U.S. GAAP. It cost us over $150 million
to do it. When we got there, we had to deal with FAS 133, which
is the equivalent to IASB 39.
I must say this is a quite problematic issue. It is very
costly for firms to reconcile to a different accounting
standard. It is very expensive to convert accounting standards,
especially in the financial services industry. FAS 133 is
actually more restrictive than IASB 39. We are, and I think
most of us in the financial services industry today, dealing
with the type of volatility issues that the Europeans are
concerned about. But IAS 39 actually allows for more lenient
accounting to take some of that volatility out. So I think it
is a very serious issue. If there is too much of a gap between
the two of them, we may not be able to achieve the professor's
goals, which I think are the right goals.
The last thing I would say is, then you go to Basel II. If
you have a number of internationally active European banks
using one accounting standard for treating derivatives, and
U.S. banks using another accounting standard, we will have an
unlevel playing field as it relates to the application of
market risk capital under Basel II, and we will have an unlevel
playing field as it relates to the ability of firms to compete
around the globe. Frankly, I am not too sure the investors in
securities really can tell you the difference between the two
accounting standards and would make an investment decision
based on the difference in the accounting standards.
So anything that Congress could do to knock these two folks
together to agree on acknowledging equivalency of accounting
standards, it is hugely important to the capital markets.
Mr. Bachus. If these objections block the adoption of a
single set of accounting standards, how critical is that to
impeding or blocking this trans-Atlantic market that we are
talking about?
Mr. Thornburgh. I think it is absolutely fundamental to the
functioning of these markets. It is the underlying data and
information on which financial markets depend. I do not think
there could be anything more important to trans-Atlantic
financial markets than common accounting rules.
Mr. Oldshue. I concur. I think they do not necessarily have
to be the same in every aspect, and there may well be costs of
convergence that are not worth the trouble in some of its
details, but I think the general theme here is entirely
correct.
Mr. Bachus. But a single set that may allow for some
differences. Mr. Thornburgh, do you agree?
Mr. Thornburgh. I think it is usually important to
companies like GE Capital, Ford Motor Credit, General Motors
Credit, banks, the agencies. If they have to reconcile or adapt
to IAS to have access to the European pool of capital, that
could be very restrictive because it will take a while to make
that conversion which I talked about. In the interim period of
time, our corporations will not have access to a huge pool of
capital around the world.
Mr. Bachus. All right. Thank you.
Chairwoman Biggert. Thank you very much, Mr. Bachus, for
those questions. I think we are just about out of questions,
but I have just one quick question. That is, should the Office
of the U.S. Trade Representative be involved in the US-EU
regulatory dialogue? If not, why not? And if yes, why? I guess
that would be the alternative.
Professor Scott?
Mr. Scott. I will take a stab. I think traditionally we
have not put financial regulatory issues into the WTO. I think
that the reason for this is a good one. Certainly, WTO has
dealt with financial issues, insofar as they have been access
issues, access to foreign markets. But with respect to
regulation, it has been left out. There is a so-called
prudential carve-out in fact, it is called a prudential carve-
out from WTO.
I think this is a good idea that regulation be separate. I
think financial issues are different from trade issues.
Certainly, the agencies in the United States that have
responsibility for this are different from the parts of the
government that have responsibility for trade. So I think that
it would not be good to try to fold this into WTO.
WTO also has, as I know you are aware, a large panoply of
processes, formal processes that take place with respect to
resolving disputes, panels, issues. It is a very legalistic,
kind of setup. Perhaps I should be in favor of that as a law
professor, but I really am not for financial issues because I
think financial issues tend to be not quite so legalistic; tend
to deal with more general policy issues. So I think we have it
right that the USTR should not be dealing with these kinds of
issues.
Chairwoman Biggert. Anyone else? Okay.
Is there anything else that you think we left out that you
would like to comment on?
Mr. Oldshue. I do not think so. We really appreciate the
opportunity to speak with you today. It has been good for us.
Chairwoman Biggert. We really appreciate your being here.
The expertise that you all have has been most, most helpful and
I hope that you will be back again sometime. We really
appreciate it.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
With that, this hearing is adjourned.
[Whereupon, at 11:23 a.m., the subcommittee was adjourned.]
A P P E N D I X
June 17, 2004
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