Alert

The Upcoming G20 Summit and International Financial Regulation

Wednesday, 29 October 2008

This is the first edition of Financial Reform Watch—International Edition, a joint effort of Blank Rome and Interel.  Its purpose is to report on and analyze transatlantic policy development relating to the world financial crisis.  It will be published every week on Wednesday.

With the ”G20” summit on international financial markets regulation slated for Washington on 15 November, officials on both sides of the Atlantic are taking stock of actions taken to date in order to assess their relevance to the summit agenda.

On the EU side, leaders will meet in Brussels on 7 November to develop ideas to bring to the summit.  Their goal is to be proactive with increasingly far-reaching proposals, rather than reacting to developments as they unfold, which had previously been the case.  Their preparations for the summit—which many are calling “Bretton Woods II,” are evidence of the increased political impetus in Europe for the development of proposals for reform of the international financial system to promote transparency, cross-border supervision, and crisis management.

In the past month, there has been a cascade of EU initiatives which may be transferable to the international policy arena.  Two prominent examples are:

• The creation of an informal warning information-exchange and evaluation mechanism—the financial crisis cell—bringing together representatives of all major EU institutions (except for the European Parliament) to “enable speedy and effective action to be taken in a crisis situation.”
• New initiatives to strengthen the supervision of the European financial sector, particularly regarding cross-border groups, with enhanced cooperation between EU member state supervisors.  While they have stopped short of creating a central financial supervisory body, that option may become more viable if the situation worsens.

The development of policies such as these may only be accelerated if the conditions of the markets continue to deteriorate.  The potential for further losses was highlighted on 28 October, when the Bank of England presented a new forecast for global bank losses.  They estimated losses to be headed towards $2.8 trillion, approximately double the bank’s previous estimates and calculations by the IMF from only a few months ago.  As crisis awareness increases, there will likely be more acceptance among EU political leaders and policymakers in the coming months for radical policy proposals that are currently considered off-limits.

Of course, Americans have already seen their government venture into numerous areas previously considered “off limits.”  Government ownership of banks, government bailouts of major financial institutions, direct investment by the Federal Reserve in commercial paper—all of these actions would have been unimaginable even three months ago.  The fact that these actions have taken place during the final days of a presidential term and that they stray so far from Republican orthodoxy have put off balance many US observers of the financial markets.  The fact that a coherent strategy has not been articulated for making all the moving parts of American policy work is troubling to some but may be a benefit to the new president who will be elected on 4 November.

The most immediate impact of that election on US policy development will be the potential insertion of the president-elect and his team into the summit meeting coming just eleven days later.  If the new president-elect wishes to engage with summiteers in some way, it will be important that he announce his financial team ahead of the 15th.  Even if he seeks to keep the summit at arm’s length, it is difficult to imagine that he would allow the presence of these officials in Washington to pass without some interaction with them—either personally or by intermediaries.

While Americans focus on the November 4 election and the difficulties of a “lame duck” administration dealing with a crisis, two key EU institutions are in a similar position.  European Parliament elections will be held in June 2009.  Following the elections, current EC commissioners and their immediate staff are likely to look for new positions, mostly outside the EU institutions, which will have an impact on the institution’s ability to respond effectively.  More importantly, however, is probably the fact that the Commission in 2009 will lack a clear political mandate to guide its initiatives.  Such a partial policy vacuum will likely be filled by the member states who thus will be even further in charge of the situation.

Following the elections, new commissioners will take office in 2010 and will likely need to compromise between the views of the member state governments and the newly-elected European Parliament. The member states, in view of the financial crisis, may outline a comprehensive program for the new Commission, and the European Parliament may exercise its right to censor the new Commission.

We will continue to monitor developments as officials on both sides of the Atlantic prepare for the summit and deal with impending changes in major institutions.

Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.