Capital Marketplace


By Charlie McCreevy

Are the lights being switched off on Wall Street and lighting up in Frankfurt, Paris and London? Is the water being drained out of the East River and diverted straight into the River Thames?

You might think so judging by recent speeches, reports and articles on America's, and in particular New York's, competitiveness from Treasury Secretary Henry M. Paulson, Mayor Michael Bloomberg, Sen. Chuck Schumer and others.

I don't disagree with them that change is underway. European Union capital market revenues are growing by an impressive 20% a year, compared to only 7% in America. The U.S. share of global IPOs has fallen to 16% last year from 57% in 2001, while Europe's has gone up to 63% from 33% during the same period.

Many seem to see the regulatory burden of the Sarbanes-Oxley Act, such as Section 404, as a significant reason for reduced U.S. capital market competitiveness. The detailed requirements for internal control of public companies have turned out to be extremely expensive to implement. Some in London have gone as far as to suggest, tongue-in-cheek, erecting statues for Sarbanes and Oxley. This is silly talk.

For one thing, anything that hurts U.S. capital markets also hurts European companies and our economy. Economic integration runs deep, particularly in financial markets. Companies active on both sides of the Atlantic are also affected by the rules on both sides of the Atlantic. Competitiveness is a two-way street.

We in Europe have improved the competitiveness of our financial markets by integrating, changing our financial regulatory structures, adopting best practice and transparent policy making, and avoiding intervention except when really necessary.

As European commissioner in this area, my approach is simple: We should not and cannot prescribe rules for every conceivable situation. There is a difference between accountancy and rocket science. The latter is science; the former is not and shouldn't be. Regulation must allow and encourage new ideas and innovation. As an accountant by profession, I might be expected to empathize with the urge some regulators seem to have to control every detail. But I think that box-ticking alone doesn't work. We need responsible judgment and disclosure.

This is why I strongly favor a principles-based over a rules-based approach. Eliminating all risk is an illusion and will lead to unwanted consequences: less innovation and growth, a false sense of security, and reduced pressure to behave responsibly. That is why I reject the siren calls for tougher regulation of hedge funds in Europe and why I strongly agree with the recent report of the President's Working Group on this issue. We must not endanger the benefits hedge funds and private equity have brought. They have increased efficiency and liquidity in our capital markets while keeping company managers on their toes. Are the regulatory hawks perhaps trying to protect weak management from shareholder activism?

What the EU and U.S. both need is top-class regulation based on best practice -- sound investor protection, balanced with a good dose of freedom for market participants. But if we want to have competitive and open capital markets in the U.S. and EU, we need to do something else: cooperate. We need to build on the regulatory pillars of the U.S., EU and other mature economies, based on equivalent but not identical standards that work for our investors and our markets.

Over the past few years, I have worked with Christopher Cox, Ben Bernanke, John Snow, Hank Paulson, Mark Olson and others to build this new cooperation. For example, we are moving towards equivalent and comparable accounting standards so that we can avoid costly reconciliation between Europe's International Financial Reporting Standards and the U.S. GAAP. The U.S. also agreed to reduce the regulatory burden of Sarbanes-Oxley by introducing more flexible timelines for the implementation of Section 404 for foreign firms. And we are getting rid of the Hotel California problem on foreign deregistration. Under current SEC rules companies are welcome to enter the U.S. stock market but can (almost) never leave again. Only companies with fewer than 300 U.S. shareholders can deregister. The new SEC proposal would allow those foreign companies to deregister whose U.S. trading volume is less than 5% of the trading volume in their primary market. This would markedly increase the number of EU firms eligible for deregistration and improve the situation.

But we need to do more. And the need to do so is growing every day as trans-Atlantic markets further integrate. So we have to shift up a gear and chart a route to recognize each other's audit oversight bodies, implement the Basel II banking accord in a way that benefits banks and customers on both sides, and move to a risk-based system of reinsurance regulation that benefits homeowners and policyholders alike. I am in Washington and New York this week to promote this agenda.

Transatlantic regulatory cooperation in capital markets should lead from the front. If we can show that it works then Japan, China, India, Russia and others will join us. This would be a big win-win for the global economy -- and guarantee that the boats will keep bobbing in the East River.