Europeans and Americans for financial reforms: Summary of financial regulation proposals in the US and in Europe

Policy Study

Background

We are still in the middle of the most serious financial crisis at least since the Great Depression. Just as in the 1930s a meltdown in the financial system starting in 2007 has pulled the real economy into a recession. While things are looking less bad than they have been over the past 18 months both the financial sector as well as the real economy remains highly vulnerable to the possibility of a second dip.
The inadequately regulated global financial market has for many years dominated the real economy. Restoring and reforming the broken down system is crucial for a quick, robust and lasting economic recovery. This has needed two major sets of interventions 1) continuing capital injections and financial sector restructuring 2) a fundamental rethink of the regulatory and supervisory infrastructure that dictates the shape of the financial system and oversees its operation.

While governments have already been injecting hundreds of billions of dollars of support funds in the financial system the discussion on regulatory reform is only just starting to get crystallized. The crisis exposed a number of fundamental flaws in the structure of the financial system and the regulatory regime and it is clear to all observers now that going back to the regime we had before the crisis is not an option. Indeed it would be impossible to restore confidence in a deeply flawed financial system that looks pretty much like yesterday‟s and foolish to try.

This has not stopped the financial sector from lobbying hard for a return to business as usual. They are investing enormous resources to avoid new regulation. Prime amongst their objectives is to water down the regulatory proposals that are currently being put forward by several governments. This has meant that the reforms being put forward by authorities in the US, EU and countries such as the UK are already weaker than what would be ideal. That is why broad based coalitions such as Americans for Financial Reform and the soon to be launched Europeans for Financial Reform need to play a strong role through providing balance to the ongoing discussions by advocating for a fundamental reforms of the financial system and strong regulations.

This paper provides a preliminary comparative analysis of the current reform discussion that is taking place in the United States and the European Union. Reforms proposed in the UK are also discussed because the UK is an important financial centre.

The objective is to inform the work of policy makers who can learn from regulatory discussions in other parts of the world and advocates who will find this useful in helping identify gaps in their efforts to get a global regulatory floor. This progressive initiative is also meant to promote the idea of “converging roadmaps for reform” for the US and the European Union. This convergence towards global regulation is realistic and dynamic, which could also be joined by Japan and China.

Read the study for FEPS by Sony Kapoor, Executive Director of Re-Define