In competitive sports, being first is always the goal. But the distance between the U.S. — at the head of the pack — and the rest of the world in crafting financial reforms is becoming a major hurdle for implementing the Dodd-Frank Act.
That was the focal point of a Senate hearing Thursday where lawmakers grilled financial policymakers on progress instituting rules — on everything from the Volcker Rule to derivatives to a resolution facility — that could conflict with foreign regimes lacking similar reforms.
"We were told here that the rest of the world would follow our lead and adopt legislation similar to Dodd Frank," said Sen. Richard Shelby, R-Ala., ranking member of the Senate Banking Committee. "Of course, this has not happened."
Members of the committee — questioning principals at the Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC), Office of the Comptroller of the Currency and Treasury Department — expressed concern about how divergent rules in other countries are slowing U.S. implementation of Dodd-Frank just as foreign nations complain that U.S. rules will unduly hurt their banks.
"Can anybody on the panel name three countries that have passed into law, signed by their leader, Dodd-Frank-type regulations?" asked Sen. Mike Johanns, R-Neb.
The witnesses — including Fed Gov. Daniel Tarullo; Lael Brainard, Treasury's under secretary for international affairs; acting Comptroller of the Currency John Walsh; and acting FDIC Chairman Martin Gruenberg — all paused, prompting Johanns to add, "Oh, that's not so good."
Rather than pass similar laws, Shelby said, foreign counterparts such as Canada, Germany, Japan and the U.K. are instead fearing that Dodd-Frank will interfere with their financial systems. Topping the list is the Volcker Rule, a provision in Dodd-Frank that curbs banks' proprietary trading. Foreign banks worry they will get caught up in the rule, and foreign governments complain that although U.S. Treasuries are exempted foreign sovereign debt is not.
"They justifiably fear that they will find themselves caught in a regulatory trap as many Dodd-Frank rules may conflict with theirs," said Shelby.
Although the witnesses acknowledged obstacles posed by the lack of comparable regimes in other countries, they defended U.S. actions to create reforms following the crisis.
"By moving first we've led from a position of strength in setting the international reform agenda and elevating the world's standards to our own," said Brainard. "The alternatives, either following the reform standard set by other countries or subjecting our firms to a divergent set of standards across the board would have been unacceptable."
Tarullo conceded that resolving potential jurisdictional conflicts is not easy.
"In these instances of regulatory reforms being pursued only in the United States, there are not likely to be obvious answers to the resulting international complexities," he said.
But both he and Brainerd added there are noteworthy examples where international coordination has been real, such as multi-lateral capital agreements under the international Basel regime.
"We've had a lot of progress on capital internationally," said Tarullo. "And I would say that in this area the principal task in the near term will be to ensure that these various agreements are being implemented rigorously, both at national levels and within individual banking organizations."
While the U.S. has moved farther ahead on its rulewriting process for the Volcker Rule, regulators said other nations were slowly beginning to move in that direction as well.
In the U.K., for example, the Vickers Commission has proposed rules to ring-fence core financial intermediation activities, while regulators in the European Union have set up a group to study how the Volcker rule is implemented.
Gruenberg said the FDIC is currently negotiating with regulators in other countries on common principles for cross-border regulation. (Dodd-Frank gave the agency specific authority to seize systemically important firms that fail, but other countries lack such a mechanism.)
The Financial Stability Board has made an international agreement on cross-border regulation a priority for 2012.
"We have made significant progress in what is admittedly a very challenging area," said Gruenberg. "The international acknowledgement of the importance of the issue of having cross-border cooperation, and a capacity to place large, systemically significant institutions into an effective resolution process, I would suggest is really an important step forward."
Still, other Senators voiced a separate set of concerns, including how quickly banks would be asked to comply with the Volcker Rule. Dodd-Frank set a deadline of July 21st, but Fed Chairman Ben Bernanke has said its likely regulators will miss that deadline, which has spurred worry that banks would be asked to comply with a rule that was not yet complete.
Criticism of the regulators' pace implementing the rule also came elsewhere on Capitol Hill Thursday, as Rep. Barney Frank, the top Democrat on the House Financial Services Committee, urged the regulators to issue formal guidance on what requirements banks should expect if the rulemaking process goes beyond July 21.
In that case, Frank said the regulators well before the Dodd-Frank deadline should outline "what, if any, compliance will be required between the statutory effective date" and when a rule becomes final. The guidelines, he said, should inform institutions of what type of enforcement would exist between the statutory deadline and the final rule, and include legal "reassurance" on which investment deals would be protected during that intermediate period.
He urged regulators to "complete work on a simplified version of the rules and issue them by Labor Day of this year.
"The agencies tried to accommodate a variety of views on implementation but the results reflected in the proposed rule are far too complex, and the final rules should be simplified significantly," Frank said.
At Thursday's hearing, Tarullo echoed Bernanke's remarks, but said regulators should continue to press on to meet Congress' statutory deadline. He noted regulators would give clear guidance to institutions on what to expect should that deadline be missed.
"It's incumbent on all the regulators to provide some guidance for firms to let them know exactly what the expectations will be, and not let this hang out there as an unknown. And I think we should be able to do that if needed," said Tarullo.
But to help remedy the problem, Sen. Mike Crapo, R-Idaho — along with Sens. Mike Warner, D-Va., Pat Toomey, R-Pa., and others — introduced a bill to fix the effective date to match when regulators are able to finalize the Volcker Rule.
Yet Tarullo and Walsh wavered on whether such a legislative fix would be necessary given that regulators would not keep firms in the dark about their expectations.
"We'll continue to try to work toward both meeting the deadline and providing guidance, so that during this period of what will be hopefully a brief period of potential uncertainty, that those affected will understand how to respond," said Walsh.