EU Internal Market Commissioner Michel Barnier was in the US over the weekend to talk tough on financial reform. But a high-ranking US official warned that Barnier was consorting with the culprits of the crisis and that his trip may prove a waste of his time.
The EU commissioner for internal market is scheduled to participate in a litany of meetings with hedge fund bosses, bank executives, the US Treasury, the Federal Reserve and several banking committees in the US administration. The talks began on Sunday and are planned to end tomorrow (11 May).
A Washington insider has criticised the EU official for organising meetings with "the most hated people in the US right now" and talking tough on bank capital rules he knows the US will not sign up to.
Barnier plans to propose rules at the end of the year requiring banks to hold higher-quality capital and more of it, to prevent the taxpayer bailouts that have left many countries with irreconcilable deficits in their budgets.
Barnier's plan would include an extension of a series of capital requirements rules to emerge from the Basel Committee for Banking Supervision.
"On the issue of capital requirements, I want to know what the Americans are doing and what they're planning to do," Barnier told the press ahead of his US trip.
Obama's anti-Basel committee
"If Barnier wants to talk to the US about capital requirements he is wasting his plane ticket," the Washington insider told EURACTIV.
In the US there is a lot of uncertainty about the future of bank capital requirements for several reasons, he explained.
Though US Treasury Secretary Timothy Geithner made clear that he intends to tighten capital requirements, it is unclear how these rules will be drafted, as a highly contested draft financial reform bill, the Dodd Bill, has had a difficult time getting Republican approval.
He also speculated that Barnier was well aware of the US position on bank capital and that the commissioner was probably paying lip service to Basel for the consumption of European observers.
Barack Obama is unsupportive of the Basel Accords, as his adviser on the issue Daniel Tarullo, a close associate and member of the Board of Governors of the United States Federal Reserve, is the author of a book that "eviscerates the Basel requirements," according to the source.
"Dan explains how Basel II contributed to the financial crisis so it is unimaginable that the Federal Reserve will embrace Basel II."
US reformers who have been writing the Dodd Bill have different ideas on capital requirements, which will probably see larger institutions hold more capital than their smaller counterparts.
Meeting the culprits
As far as meetings with bank executives on Monday go, the insider said Barnier was doing himself a disservice by meeting exclusively with those who caused the crisis.
He was referring to a scheduled meeting with Lloyd Blankfein, chairman and CEO of Goldman Sachs, Vikram Pandit, CEO of Citigroup, and Jamie Dimon, chairman and CEO of JP Morgan Chase.
"And if he is meeting Blankfein, he should be aware that his conversation may be tapped," the insider continued, referring to the ongoing investigation into Goldman Sachs regarding a deal done with the hedge fund Paulson & Co on shoddy mortgages (EURACTIV 20/04/10).
The meeting with investment bankers on Monday follows a dinner with the US major hedge funds, KKR and Blackstone among others, to talk about US reservations on EU rules to make dealings in hedge funds and private equity more transparent.
In March, Geithner wrote Barnier a carefully-worded letter warning that EU rules would discriminate against US funds by demanding they either adopt the same rules as their EU counterparts or attract investors from elsewhere (EURACTIV 12/03/10).
A spokesperson for the commissioner said Geithner's concerns would be the subject of discussions between the fund managers and Barnier.
EU Internal Market Commissioner Michel Barnier has admitted that the time for financial reform is running out. Since the last G20 meeting of world leaders, the US and the EU have taken divergent routes on how to make the financial sector more accountable to the public and prevent future systemic crises (EURACTIV 27/04/10).
In particular, the US and the EU have long held different views on how much capital banks should have on their books to prevent future bailouts.
The Capital Requirements Directive, adopted in 2006, is currently undergoing its fourth review at the European Commission (EURACTIV 01/03/10). The rules would enforce proposals under discussion by the Basel Committee for Banking Supervision, which sets minimum standards for banks in 27 countries, including the US and the EU.
The US never fully implemented the last set of Basel capital rules from 2004, which has left European banks jittery about tougher capital requirements that they believe would leave them at a competitive disadvantage given that they lend more than US banks do.
A recent report from the French Banking Federation stoked those fears, claiming that upcoming EU rules on capital requirements, to guard against over-the-counter derivatives, would decrease their lending capacity and lead to a 6% drop in Europe's gross domestic product over the next five years.
- 26-27 June 2010: World leaders meet at G20 talks between developed and developing nations.