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Wednesday, May 22, 2002
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.

    The committee met, pursuant to call, at 10:12 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding.

    Present: Representatives Roukema, Royce, Kelly, Gillmor, Weldon, Manzullo, Shays, Shadegg, Miller, Cantor, Hart, Capito, Tiberi, Lafalce, Waters, Mrs. Maloney of New York, Watt, Bentsen, Mr. Maloney of Connecticut, Sherman, Inslee, Mrs. Jones of Ohio, and Lucas.

    Chairman OXLEY. The meeting will come to order. The Committee on Financial Services meets today to examine an issue that will have major implications for this committee and for America's financial services industry, the total overhaul of Europe's financial services sector.
    Since 1999, the European Union has been working to implement an ambitious agenda known as the Financial Services Action Plan. Targeted for completion by the year 2005, this plan includes major changes for EU regulators, financial service providers and investors.
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    In late March of this year, I led a congressional delegation to Brussels, London and Berlin to meet with political and business leaders about developments in the European financial services sector. Ranking member LaFalce accompanied me on the trip, as did our colleague from North Carolina, Mel Watt. At each meeting we attended, the primary topic of discussion concerned major changes being undertaken as part of the Financial Services Action Plan.
    While Europe's move toward integration has been widely praised in the U.S. for the measures it takes to streamline the European financial marketplace, some concerns still exist. These concerns include new rules for the supervision of financial conglomerates, international accounting standards and corporate prospectuses. Unfortunately, the plan includes the divisive issue of expensing for stock options. I simply don't understand why the EU would choose this forum, which after all is supposed to be dedicated to harmonizing accounting standards, to raise this contentious issue.
    In addition, the action plan is at the heart of the EU's stated goal of making the European Union ''the most dynamic and competitive knowledge-based economy in the world'' by 2010. This committee must do everything possible to give American businesses the tools they need to compete in the global economy, and we must continue to anticipate challenges to American competitiveness.
    The global economy will benefit greatly if our friends across the Atlantic are able to streamline their markets and regulatory authorities, but it must not come at the expense of transparency and free trade. The U.S. financial services industry is the most innovative, competitive and transparent in the world. Coupled with the fact that Europe is both our most active trading partner and our most powerful ally, we are well served by staying ahead of the curve with respect to the coming changes in Europe.
    The Treasury Department, the SEC and Federal Reserve are closely following the changing financial services landscape in the EU. I would like to welcome representatives from each organization today, Governor Mark Olson, Assistant Secretary Randy Quarles and Ms. Annette Nazareth, who will be testifying about their impressions of the Financial Services Action Plan, and about their continuing dialogue with European counterparts.
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    I would also like to thank representatives from the private sector, and from academia, who will go into further detail on implementation of the plan, how it will effect U.S. interests.
    Before the witnesses testify, I will now turn to the distinguished gentleman from New York, the ranking member of the committee, Mr. LaFalce, for any comments that he may have.
    [The prepared statement of Hon. Michael G. Oxley can be found on page XX in the appendix.]
    Mr. LAFALCE. And you have forgotten, your favorite traveling companion. Okay.
    I really want to thank Chairman Oxley for holding this hearing on the European Union's Financial Services Action Plan. I think this hearing can serve a very important purpose by informing our members of the significant developments in the integration of the financial services sector taking place in the European Union. The EU's Financial Services Action Plan has the potential to transform the European market for financial services.
    Integration of the EU financial services sector can have profound implications, not only for financial services firms but, more generally, for the strength and competitiveness of the EU's economy and businesses. I would like to emphasize, and I think our witnesses are going to agree, that an integrated market in Europe is ultimately of benefit to U.S. firms operating in the EU.
    The efficiencies gained from a larger, integrated market will far outweigh the costs associated with the changeover. In fact, one estimate suggests that economic gains resulting from financial services integration could be an additional 43 billion euros, or about $40 billion for the EU economy annually. The United States, and the rest of the global economy, will benefit from the successful economic integration, and I hope we will do all in our power to support the Europeans in their endeavor.
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    And clearly the EU is up to the task of integrating complex regulatory schemes, not only in financial services, but across economic and social sectors. The introduction of the euro currency, first as an accounting entity, and now as circulating currency has gone remarkably well, and has silenced many critics of integration as a result.
    It is important to keep the big picture in mind as we look at their plan. The members of the EU are in the midst of a grand political, social and economic experiment. It is not unlike the one our founding fathers embarked on 226 years ago. The introduction of the euro alone has been a significant step toward unifying their economies, just as the introduction of Federal Reserve notes did for our country early in the last century.
    It may be inevitable that such a major revamping of the financial services regulatory structure in the EU will highlight differences in approach between our two regulatory systems. And we should be diligent in assuring that U.S. financial services providers operating in the EU are not disadvantaged by standards that may discriminate inappropriately against foreign financial service providers.
    At the same time, we should be mindful that EU legislators must make the same judgments that Congress has had to make with respect to competition, fairness and consumer protection for our own financial services.
    That is my prepared statement. Let me just take a few minutes now to make a couple of additional points.
    First of all, we have a lot to learn from the EU. The adoption of the euro is tremendous, it is significant, it is profound. But when we negotiate trade agreements, we negotiate everything but something dealing with the currency of our respective countries.
    And one of my chief concerns, when we negotiated the Canadian-American free trade agreement, was the relative value of our currencies. And when we negotiated it, was about 90 cents on the dollar, and today it is closer to 60 cents on the dollar. That is profound. You look at the trade balances, and they will parallel that change almost to the dotted i and crossed t. If you look at the impact, especially on border communities, it is profound, intuitively.
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    When I would go to a shopping market in Niagara Falls, New York, 25 percent of the people I greet couldn't vote for me, because they were Canadian. Today, they all could vote for me, but they just don't want to.
    But there are no Canadians. I could met an awful lot of my constituents by going to Niagara Falls, Ontario. We have to take that into consideration.
    I was the chief proponent of the Canadian-American, but I also have problems with the NAFTA, and my chief concern with the NAFTA, as chairman of the Small Business Committee, I had a hearing on the imminent devaluation of the Mexican peso. And within a short period of time, less than a year, I mean we had a precipitous devaluation, which was not uncommon with the Mexican peso, but it was profound. And it had an enormous, enormous impact on the standard of living on the people in those countries, et cetera. So my point is, we can't negotiate trade without considering currency and trying to bring them into stability.
    Something else too. I will be finished in a second, Mike. There are so many things that if we want to engage an integrated global economy, we have to make sure that our standards are similar to theirs, you know, accounting and et cetera. But we can't try to get the Europeans to go for our standards if our standards are lower as political inconvenient. We should use the higher European standards as something to emulate and, when it is appropriate, vice-versa. And that is extremely important, and I thank the chair for his indulgence.
    Chairman OXLEY The gentleman's time has expired. Any further opening statements the—

    Mr. SHERMAN. Mr. Chairman—
    Chairman OXLEY. The gentlemen from California, Mr. Sherman?
    Mr. SHERMAN. Thank you, Mr. Chairman. I would like to use this opening statement to address what I think is the most important international financial issue facing this committee and perhaps this Congress, within the jurisdiction of this committee and the Assistant Secretary of the Treasury that comes before us.
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    This country's leadership is engaged in two parallel tracks. One is to tell the American people that we are in a war on terrorism, and that we are trying to protect their safety. The other is to go along and to get along with European financial bureaucrats at tea parties regardless of whether that poses a threat to American safety.
    The State Department yesterday announced that Iran was the number one sponsor of state terrorism. The State Department was not fooled by the allegedly moderate, but powerless, front man who serves as president of Iran. The State Department understands that power in Iran is really held by unelected extremists. These unelected extremists have arranged their government to spend the minimum necessary on domestic expenditures which they need to do to hold onto power. Every additional dollar is then available for their nuclear weapons program and to sponsor terrorism.
    Today, the World Bank is going to provide and is planning to provide hundreds of millions of dollars of the money needed for those domestic expenditures, freeing up an equal amount for Tehran's nuclear weapons development program, a program bent upon not only developing those weapons, but smuggling them into the United States. But the tea parties with European financial bureaucrats continue.
    With the last administration, the World Bank decided to loan, I believe it was, $232 million. What did we do? We voted no, and when we got outvoted, we went to tea.
    Okay, that was before September 11, and perhaps we didn't have to view the war on terrorism as being all that important.
    Now, in a recent article by Dow Jones, it is revealed that the World Bank is planning to loan an additional $755 million. And unless Congress acts, we will do the same thing. We will vote no. We will vote no in a loud voice. We will get outvoted, because we cast only 16 percent of the votes. And as this article, which I would like to make part of the record of this hearing, reveals the European diplomats have already indicated that they are guaranteed to outvote us. And then we will go to tea with the European bureaucrats who understand that as long as Europe supports the government in Iran, that when that government develops nuclear weapons, they will be smuggled into American cities, not European cities.
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    Chairman OXLEY. The gentleman's time has expired.

    [The following information was subsequently furnished by Hon. Brad Sherman for the hearing record.]

    Mr. SHERMAN. I would just like to bring to the attention of the committee the intention to provide over $800 million to the World Bank at a time when the World Bank is planning to loan $755 million to the government of Iran.
    I yield back.
    Chairman OXLEY. The gentleman yields back.
    Are there further opening statements? Noting none, then we return to our—I am sorry, Judge Jones?
    Mrs. JONES OF OHIO. Thank you, Mr. Chairman.
    I just want to welcome each of those witnesses to our hearing this morning, and particularly, Mr. Chairman, I would like to welcome Mr. Mark Olson, governor of the United States Federal Reserve Board.
    On Friday of last week he was in my congressional district. The Federal Reserve sponsored a small business workshop for the small businesses in my congressional district. And this is a part of the hearing I want to thank him personally for coming and sponsoring that event on behalf of the small businesses in my congressional district.
    And I look forward to the testimony of each and every one of the witnesses that is going to be testifying. And, of course, you can look forward to probing questions from each of my colleagues.
    Thanks, Mr. Chairman.
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    The CHAIRMAN. Thank you.
    We will begin with the hardworking Mr. Olson, particularly as this committee is concerned.
    And we appreciate your being here with us, and you may begin.


    Mr. OLSON. Thank you, Mr. Chairman. I have a statement that I will submit for the record, but I would like to just pull a few comments from it for an opening statement.
    First of all, it is appropriate to thank you for the hearing and for the timing of the hearing. You mentioned in your opening statements that we are looking at a 2005 deadline for implementation of the plan. And the question might arise is, is it too early to look at this issue?
    But as we know, international negotiations are an iterative process, and so it is never too early for us to start taking a look. So the hearing is very timely.
    The Federal Reserve supports the efforts of the European Union to try to achieve greater efficiency and transparency in its financial markets. And the Financial Services Action Plan is an important step in doing that. Encouraging international participation in these markets to promote an efficient and an innovative marketplace will benefit all of us.
    Both you, Mr. Chairman, and Congressman LaFalce brought up the subject of assuring that U.S. financial institutions will have the opportunity to compete in a changing environment. We have noted that one of the important benchmarks that we have used to try to assure a level playing field is the concept of national treatment. National treatment became part of U.S. law in 1978, with the International Banking Act, and I think it is important to note that both the European Union and the U.S. have continued to follow that principle.
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    The results up to this point speak for themselves. From the European Union nations, there are currently 66 banks functioning in this country, with a total of $1.7 trillion in assets under management—banking and non-bank assets. So there is a very substantial participation of EU banks functioning in this country.
    And at the same time, from the U.S. in the EU nations, there are 27 banks, with a total of $650 billion in total assets. So it is very clear that we have very good international cooperation with respect to international banking.
    In achieving national treatment, there are a number of things that the Federal Reserve does and has done. As directed by the fiducial legislation, we assess the supervisory capability of the home country of the banks that do business in this country.
    Importantly, we also have a very transparent rule-making process. When we propose rules that will affect foreign banks, the proposed rules are out for comment, we invite comment and often receive comment, both from the foreign banks and from foreign bank regulators, that help us assure that we are achieving national treatment.
    We do provide flexibility in considering how the structural differences in jurisdiction can be accommodated, and there are a number of examples of where that has been done. Finally, in this country we have a wide variety of charters that would accommodate different levels of banking participation in this country by foreign banks.
    There are three specific issues, with respect to the directives, that we would like to comment on.
    The first is the financial conglomerate directive, which is aimed at the concern that the regulation or supervision focused on the individual entities may leave some gaps if not analyzed on a conglomerate, or consolidated, basis. We at the Fed are very comfortable that the consolidated supervision under our jurisdiction, with respect to bank holding companies and financial services companies, is fully consistent with that directive.
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    With respect to capital adequacy, we would like to point out, and I know that this committee is well aware, that the European Union's efforts with respect to capital adequacy are going at the same time that the Basel II negotiations are under way, and the timetables are relatively concurrent, so that we expect the differences or concerns with respects to differences in capital treatment will be addressed and recognized.
    Finally, with respect to the international accounting standards, we would point out that while the financial reporting is under the jurisdiction of the SEC within the U.S., that there are significant efforts under way to assure, with the SEC's participation—the Fed is also involved—that we see a greater amount, and a continuing amount, of overlap in international standards and U.S. GAAP. And we will be participating in that process as we move forward.
    Finally, Mr. Chairman, we would just point out that we at the Fed and the other regulators have excellent relationships with the European supervisors and other supervisors around the world. And I think it is that continuing ability to dialogue that has helped assure that there is consistency in the regulation.
    And I would like to just end by saying that I very much enjoyed being with Congresswoman Jones on Friday, it was an excellent seminar. And I am happy to be here today.

    [The prepared statement of Hon. Mark W. Olson can be found on page XX in the appendix.]

    Chairman OXLEY. Thank you, Mr. Olson.
    Mr. Quarles?

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    Mr. QUARLES. Thank you, Mr. Chairman, Ranking Member LaFalce, and members of the committee. It is a pleasure to be here testifying today. I agree with Governor Olson that this is a very timely hearing.
    I have prepared remarks for the record. I will not subject you to the tedium of reading them, but I just want to make a few comments.
    The first is that the Financial Services Action Plan that Europe is in the process of implementing, in our view, offers a clear win-win of opportunity for both Europe and the United States, if it is well managed. The experience of the U.S. teaches us that efficient capital markets are among the most critical structural reforms for promoting robust growth. There are European estimates that suggest that financial market integration could boost European growth by at least half a percent annually, which is a significant addition.
    It has been a strong theme of the Treasury and Secretary O'Neil that the U.S. cannot be the only engine of global growth, as we have witnessed in the last global slowdown. And a successful Financial Services Action Plan could help Europe become a welcome second engine of a growing global economy.
    Another point I would make is that U.S. financial firms are among the most competitive and efficient globally. They are leading worldwide players. So U.S. firms can help Europe achieve its aspirations in the Financial Services Action Plan.
    Clearly, for the reasons that you and others have outlined, the U.S. will need to continue monitoring the FSAP very closely, in light of a few principles, from our point of view.
    The FSAP should be consistent with the reality of an open and global financial system; so it shouldn't tilt the playing field. It should reward the most efficient firms that are operating in the European market, regardless of the firms' country of origin.
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    And given that the financial services industry is usually a step ahead of its supervisors, the FSAP itself underscores the need for supervisors to consult closely with financial firms. So this process should take place in an open and transparent manner, the process of developing the regulations under the FSAP that will govern the operation of financial firms in Europe. And in our view, recently EU officials have undertaken some welcome steps to meet that challenge.
    Next, in implementing the FSAP, the decisions that European policy makers will take will reflect the diverse interests and financial traditions of Europe, as well as the need to promote the safety and soundness of financial markets. But, in our view, the decision should be taken in a manner that rewards innovation and competitiveness, and recognizes the reality of how global firms operate.
    These points relate to a number of specific FSAP directives that are on the table. First, U.S. investment banks often net out purchases and sales of securities. In other parts of the world, such transactions are put through exchanges. This issue is raised by an investment services directive. And in our view, this directive ought to be flexible enough to take account again of the reality of how firms operate, and that there are different ways to operate in a safe and sound manner.
    Another: What is adequate capital for an investment bank will differ from what is adequate capital for a commercial bank, given the different nature of their businesses. This is an issue that arrives within the financial conglomerates directive, where one shouldn't attempt to shoehorn a capital regime designed for commercial banks under the operation of investment banks, simply because of the universal nature of European banks, because not all of our firms operate that way.
    Next, firms may wish to list securities in a given country, even if their home base of operation is elsewhere. Authorities in the firm's home country, and they prefer that the listing take place there. That is an issue that will need to be addressed in the directive on prospectuses.
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    Now, inevitably, in all of these areas and more, there will be differences in the way U.S. and European authorities and financial institutions approach these issues of common interest.
    So these issues need to be well managed. It wouldn't be appropriate, for example, for European officials to attempt to impose European regulatory standards on the rest of the world or to expect U.S. financial institutions to be identical in structure to European firms and to deny our institutions the benefits of the leading-edge technology.
    Naturally, we would be concerned by any proposals that might discriminate against the European operations of U.S. financial institutions and suggest that U.S. supervision was not appropriate simply because it wasn't identical to Europe's way to doing business.
    Rather, in our view, we need to put aside any formal differences, recognize that we share a common set of objectives, that the goal of increased European financial integration is beneficial to both Europe and the United States and to firms in both Europe and the United States, and to ensure that these objectives are being achieved in substance. It won't be easy, but we are working together to achieve that.
    We are in close contact with our European counterparts. Last November, the senior EC official responsible at the day-to-day level for the FSAP visited Washington, met with John Taylor, the Undersecretary of the Treasury. In March, a team of Treasury, Federal Reserve and SEC officials visited Brussels. At the end of this month, the EC commissioner for the internal market, Frits Bolkestein, will be visiting Washington. His chief lieutenants will then follow up in mid-June for further discussions.
    So this is a process that we are very involved in and monitoring very closely and, in fact, are seeing progress in these discussions on a number of these issues of concern to us and to U.S. financial firms.
    It is important to note that this isn't just a one-way dialogue. Just as the U.S. is greatly interested in how European financial markets are developing, European officials are interested in how U.S. financial markets develop. And recognizing this, the two-sided nature of this and the win-win nature of this, President Bush and President Prodi, at the May 2 summit in Washington, put this financial market dialogue at the top of the U.S.-EU positive economic agenda.
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    So let me just conclude by underscoring that the U.S. welcomed Europe's efforts to integrate its financial markets and that we at the Treasury, in conjunction with our colleagues at the SEC and the Fed, intend to remain closely engaged with Europe to help ensure that the FSAP contributes to a strong and more robust international financial system.
    Thank you.

    [The prepared statement of Randy K. Quarles can be found on page XX in the appendix.]

    Chairman OXLEY. Thank you.
    Ms. Nazareth?


    Ms. NAZARETH. Chairman Oxley, Ranking Member LaFalce and members of the committee, thank you for the opportunity to testify before you today on behalf of the Securities and Exchange Commission on certain pending proposals of the European Commission. My testimony today will focus on the EC's proposal for a directive on consolidated supervision of financial conglomerates. I have also included in my written testimony a brief discussion on the adoption of international accounting standards, the proposed prospectus directive and the capital adequacy directive.
    European capital markets have been undergoing a major transformation. One aspect of this transformation is the EC's commitment to integrate financial markets in the European Union.
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    The EC has stated that a single financial market will be a key factor in promoting the competitiveness of the European economy. An integrated market is being facilitated in part by the EC's development of the Financial Services Action Plan, which is a series of legislative proposals that would subject all financial services firms active in the EU to consistent standards of regulations.
    One of the primary legislative proposals by the EC under the action plan is the proposal for a directive on the consolidated supervision of financial conglomerates. This proposal, which I will refer to as the proposed directive, would impose a series of quantitative and qualitative requirements at the holding company level of a financial conglomerate or a mixed financial holding company, which would be applied by an EU member state's home regulator, which will be designated as the coordinator.
    If a financial conglomerate or a mixed financial holding company operating within the EU does not have its head office within the EU, the proposed directive provides for the verification by EU authorities that the firm is subject to supervision that is equivalent to the EC's proposed directive. If an equivalence determination is not made, then under the EC's proposal EU authorities could adopt other methods, such as imposing additional requirements on the firm to achieve the objectives of the proposed directive.
    Several U.S. securities firms have communicated to the commission that they have serious concerns with the proposed directive. They fear that the EU authority that will make the equivalence determination will take the position that the commission's supervision of securities firms at the holding company level is not equivalent to the EC standards. They conclude that the proposed directive would not only increase their cost of doing business in Europe, but would also place them at a competitive disadvantage with European-based firms.
    The commission shares many of the EC's concerns about how to contain and supervise risks posed by financial conglomerates and believes that our approach to the supervision of securities firms is as effective as that in the proposed directive.
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    The commission's mandate includes ensuring that our securities firms have the highest level of financial integrity and that they operate in a manner that promotes the protection of investors. Our regulatory regime has operated with remarkable success since the commission's financial responsibility regime was implemented in 1975. Very few large securities firms have failed, and in no instance has a failure had any significant impact on markets or required federal funding to liquidate a firm.
    The commission's financial responsibility program is an important component of its supervision of securities firms. This program requires that broker-dealers maintain prescribed amounts of liquid net worth, safeguard customer funds and securities, keep and maintain accurate books and record and regularly file detailed financial information with the commission and with the self-regulatory organizations.
    In addition to the regulation of securities firms, Congress, in 1990, amended the Securities Exchange Act to provide the commission with specific authority to obtain information regarding the financial activities of affiliates of securities firms.
    Under these rules, often referred to as our risk assessment rules, securities firms that are part of a holding company structure are required to provide the commission with comprehensive financial and operational information on a periodic basis.
    This information allows the commission staff to evaluate the material risks to securities firms posed by their affiliates. The information reported to the commission under the risk assessment rules is supplemented on a voluntary basis by risk information provided by the Derivatives Policy Group.
    DPG members now file with the commission on a monthly basis certain internal financial and risk management reports at holding company level. These reports generally contain extensive information regarding the firm's financial condition and risk exposures, including granular detail with respect to their value at risk computations and credit risk exposures.
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    Finally, the commission may use its authority, granted under the Gramm-Leach-Bliley Act, to create a new type of voluntary holding company called a supervised investment bank holding company. Such a supervised investment bank holding company is generally defined as an entity that owns or controls one or more registered securities firms but is not affiliated with an insured bank, a savings association or a foreign bank. The staff plans to recommend that the commission implement this voluntary regime in the near future.
    The commission believes that its regulation of U.S.-registered securities firms, and their affiliates, satisfy the proposed directives by providing equivalent group-wide supervision. Commission staff meet on a regular basis with foreign regulatory authorities to discuss regulatory issues and concern relating to global securities firms.
    The commission's staff, as Randy Quarles mentioned, has had extensive discussions on these issues of equivalence with EC representatives and foreign regulators, and the commission is committed to continuing these discussions in order assist them in arriving at a favorable equivalency determination under the proposed directive.
    Thank you for this opportunity to testify.

    [The prepared statement of Annette Nazareth can be found on page XX in the appendix.]

    Chairman OXLEY. Thank you, Ms. Nazareth.
    And thank you all.
    Let me begin by asking Mr. Olson about the issue that I had addressed in my opening remarks, and that is expensing stock options, a very non-controversial issue—we thought we would start you off with any easy one.
    As you know, the International Accounting Standards Board, in conjunction with the action plan in Europe, is promoting the concept. What do you make of that? How does that jibe with how our system currently works? And ultimately, is there a competitive issue here lurking beneath an attempt to change the way that we look at how we expense these options?
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    Mr. OLSON. Mr. Chairman, our chairman has responded to questions regarding the accounting treatment for stock options. But that is not an issue that the full Fed board has taken a position on, in part because accounting issues come primarily under the jurisdiction of the SEC.
    So whereas Chairman Greenspan is occasionally asked for his input on broader issues beyond the Fed, we have not taken a position on that issue. So I would defer on that one to the SEC.
    The CHAIRMAN. Ms. Nazareth is avoiding my gaze, here.
    Since you raise the issue, let me ask Ms. Nazareth for her viewpoint, and coming from the SEC.
    Ms. NAZARETH. Well, I am not the commission's expert on the accounting issues. I think certainly the commission's position on all of these accounting issues is what we really should be working on is convergence of accounting standards, and it is unfortunate that, you know, one of the first issues that the IASB has chosen to consider is this very contentious issue, and in fact is taking a position that is contrary to what is currently the standard in the U.S.
    So I think our goal, obviously—as with all of these issues, and certainly Ranking Member LaFalce said—you know, in all of these regimes we should be seeking whatever is the best approach and not taking the position that whatever is the most expedient, politically or otherwise. And this is obviously a very important but contentious issue, but I think it would be incumbent on all of the standard-setters to try to arrive at some common ground, in terms of how to report stock options.
    The CHAIRMAN. Let me ask Mr. Quarles: The European Union, according to their statement, wants to become the most dynamic, competitive knowledge-based economy in the world in the next eight years. How realistic is that goal and does that present some competitive issues for our country?
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    Mr. QUARLES. Well, as for whether the goal is realistic or not, I think that we—obviously Europe is a very strong economy, and has the potential to be much stronger with appropriate structural reforms.
    What I would stress, I guess, is that the United States doesn't really have anything to fear from competition. And, in fact, just as we believe that competition is good within our own economy, we are strengthened by having strong competitive economies abroad. Those are markets for our goods and services. And they keep us on our toes as well.
    So I don't view that as a threat, so much as an opportunity for U.S. firms, and indeed a welcome goal of the Europeans, to seek to become the—and you have to discount the puffery in being the ''most dynamic economy''—but to increase the dynamism of their economy, and to increase the amount of innovation in their economy is, in fact, something that I think we should encourage, because, in fact, that will benefit U.S. firms that operate in Europe as much as it benefits European firms.
    The CHAIRMAN. Thank you.
    Ms. Nazareth, how does the SEC coordinate, if you do, with Treasury and the Fed in responding to the Financial Services Action Plan? Is there a working group, or do you all work separately?
    Ms. NAZARETH. Well, I think it has been somewhat informal. But I think it has been very effective in the recent past. As Mr. Quarles said, a group representing both the SEC, Treasury and the Fed, you know, went to Europe and met with EC officials and with the regulators at the federal level, to discuss issues relating to the financial services directive and other elements of this. And I think it has been very, very productive. But I don't think there is necessarily a formal mechanism, but it has been very constructive informally.
    The CHAIRMAN. Is USTR involved in this process as well?
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    Ms. NAZARETH. No.
    The CHAIRMAN. No. I am out of time.
    The gentleman from New York.
    Mr. LAFALCE. I thank the chairman.
    The chairman brought up the issue of the expensing of stock options. I have tried, I believe successfully, in my 28 years in Congress, never to take issue with FASB, believing that the intricacies of accounting are so complex and great that it is always best to defer to them, even when, for example, the chairman of the Federal Reserve Board might differ, as he did on occasion, or when the chairman of the SEC might differ, which he did on occasion; to just stay out of that.
    And recently, I had dinner with Ed Jenkins, the Chairman of FASB. He will be leaving shortly, I think. And I asked him to give me a letter treating the history of FASB's recommendations, when they did recommend that stock options be expensed, and the opposition that they received from various individuals and groups. And he did send me a detailed letter explaining why he thought it was necessary then to expense them, and the difficulties he had in effectuating that. And I ask unanimous consent that Mr. Jenkins' letter be made a part of the record.

    [The following information was subsequently furnished by Hon. John J. LaFalce for the hearing record.]

    The CHAIRMAN. Without objection.
    Mr. LAFALCE. Good. And we should have copies of that for anybody who might be interested shortly. I think it will make interesting reading.
    One of the questions that I asked Mr. Jenkins was, Well, people are saying it is so difficult, evaluating stock options, extremely difficult. And he says, basically, nonsense. It is done all the time. It can be done. There is a specific methodology to do it.
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    I note that individuals such as Chairman Greenspan agree with him on that issue. Individuals such as Warren Buffett agree with him. We ought to get on with it. I think it is something the securities Industry Association should work with FASB on, in trying to come up with something. I think the capital markets would be much better. And now, if the European Union is taking that approach.
    Is that correct, European agreement is going to be taking that approach calling for the expensing of options? Anybody want to comment?
    Mr. OLSON. I am not sure if it is the European Union or if it is the International Accounting Standard Board.
    Mr. LAFALCE. Oh, yes, the International Accounting Board. Have they adopted that, or are they in the process of adopting that?
    Mr. OLSON. My understanding is that it is being debated now.
    Mr. LAFALCE. Being debated? I think I got from Ms. Nazareth's testimony that she thinks it is likely to be adopted.
    Is that correct, Ms. Nazareth?
    Ms. NAZARETH. I don't think it is likely, but it is certainly being actively debated at this time.
    Mr. LAFALCE. Well, I do think it is something that we should pursue. And I leave it up to you to pursue. I am not sure that the Congress is aggressively going to pursue that, but it ought to be pursued.
    Now let's pursue another issue, though, too, and that is the issue of privacy. And I knew where the previous administration, Mr. Quarles, stood on the issue of privacy. Because I worked with them on the privacy bill. And we passed the best privacy bill that we could pass. But it was a good first step. It was not adequate. And therefore we specifically said the states could go further. Now, the industry at large would love to see federal pre-emption. And I am open to that, if we can take the additional steps necessary.
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    Working with the previous secretary of the Treasury, Mr. Summers, I introduced legislation, and he and Gene Sperling, et cetera, were at my side at a press conference, to take that next step. Now some are arguing to the European community, ''Well, you ought to hold us harmless. Whatever we have done so far should be adequate. I say, no, not at all; that was the first step.
    What is the position of the Bush administration with respect to the adequacy of the privacy standards that were enacted as part of the Financial Services Modernization Act of 1999?
    Mr. QUARLES. You are referring simply to the position on the privacy standards domestically, or in our—
    Mr. LAFALCE. Domestically, yes, domestically.
    Mr. QUARLES. —discussions with the EU?
    Mr. LAFALCE. No, first domestically. Has the Bush administration taken a position?
    Mr. QUARLES. I guess I should say that, without wanting to pass the buck to someone who is not here, the responsibility for that in the Treasury Department rests with the Assistant Secretary for Financial Institutions. And so I would be loathe to speak for her today.
    Mr. LAFALCE. Well, I would think that in negotiating with Europe that it would be helpful to know what our position is domestically.
    Mr. QUARLES. You are absolutely right.
    And I am not aware that there has been any modification of the position on the adequacy of privacy standards.
    Mr. LAFALCE. Modification? What do you mean modification? Modifications of a position suggest there is a position, that is one thing. Now, if you mean there is no position, that is something else.
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    Mr. QUARLES. I believe that the Treasury—we are at least engaging with the Europeans on the basis of ensuring that the Europeans view our standards as adequate.
    Mr. LAFALCE. I was under the impression that Secretary O'Neill, at least personally, is a hawk on privacy, similar to Senator Shelby. And someone like Senator Shelby, who is the ranking Republican to be or the chairman to be, depending on the outcome of the elections, believes that the existing standards are grossly inadequate. And it is my understanding that Paul O'Neill personally shares his sentiments.
    The CHAIRMAN. The gentleman's time has expired.
    Mr. LAFALCE. Thank you.
    The CHAIRMAN. It may be safe to say that the administration supports the Oxley language that was added to the Gramm-Leach-Bliley Act that became the final product. I would appreciate if you would check on that, but I suspect that is probably where the administration stands.
    Mr. LAFALCE. Well, the Clinton administration supported it at that time. I thought it was the LaFalce language rather than the Oxley language to tell you the truth, Mr. Chairman, because I was involved in the conference deliberations, you know, 100 percent.
    Mr. QUARLES. If both of you claim that language, I am sure we must support it.
    Mr. LAFALCE. Oh, you supported it, but we also thought it should go a lot further. Okay, thanks.
    The CHAIRMAN. The gentleman's time has expired.
    The chair would note that we have two votes on the floor. We have about eight minutes left. Does someone on this side of the aisle wish to say about three minutes of questions? What order did they come in?
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    Mr. Watt, I will recognize you for three minutes, if that is okay, then we will break for the vote.
    Mr. WATT. That is fine, Mr. Chairman. I appreciate it.
    I just wanted to, first of all, express my gratitude to you for the privilege of traveling to Europe on this most recent break that we had to discuss some of these issues. And I feel like I at least understand what the witnesses are saying, with that as a backdrop. And that was very helpful.
    I did want to ask a question about this equivalence determination the conglomerates directive and play the devil's advocate a little bit.
    From the European discussions that we had on this recent trip, it seemed to me that what they were advocating for was a single point of corporate accountability and a single point of regulatory or supervisory accountability, neither of which seems to be an outrageous position. So let me just, kind of, be the devil's advocate here.
    It seems to me on the corporate accountability single point, we have found some lessons in the Enron situation that perhaps there needs to be a corporate accountability at the top. And we do have, kind of, a diffuse regulatory accountability between the Fed, the Treasury and the SEC, and it seemed to me that what they were saying was that there needs to be somebody where the buck stops on these issues. And that is particularly the case if you have an international European group that is wanting to deal with one point of contact or one final authority in the United States. It is even more imperative once you get outside of the United States to have, kind of, a single point of contact.
    That didn't seem especially outrageous, and I would welcome your reaction to that. Maybe I am oversimplifying it, misstating it. What seems to be the negative side of what they seem to be saying on those two fronts?
    I guess Ms. Nazareth seemed to address this more directly. It seemed to me that Mr. Olson and Mr. Quarles were talking more about the capital standards part of the conglomerate directorate.
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    But Ms. Nazareth, and if either of the others have comments on it, that would be helpful.
    Ms. NAZARETH. We certainly don't take issue at all with the goals of what the Financial Services Action Plan is seeking to achieve, especially with respect to financial conglomerates. We share concerns over the ability to effectively monitor, you know, large complex institutions. We obviously are concerned about financial stability and the like.
    I think, though, that there is a long history in this country of having, you know, more than one regulator for financial entities based on the businesses that they conduct. And there is a long and very proud history of coordination between the agencies. I think we need only look most recently to September 11 to see how successfully those financial regulators worked together in getting our markets, back up and running.
    You know, there is often a sense when there is a change that is, sort of, an innovation in a new place that you get people who are very convinced of the rightness of their new approach. Certainly in Europe in some of the jurisdictions, you now have a single, one-stop shopping with respect to financial regulation: The regulation of the banks and the insurance companies and the securities firms lie in one entity.
    Whether or not that model is superior to the more specialized, functional model that we have remains to be seen. It is a relatively new model in Europe. And, in fact, all of the countries within Europe don't have that model; it is just some.
    Chairman OXLEY. The gentleman's time has expired.
    I thank our panel. And we will dismiss this panel with our sincere thanks for your effort. And the committee stands in recess for 15 minutes.
    The CHAIRMAN. The committee will come to order.
    We would like to call up the distinguished second panel. They are Professor Desmond Dinan, Jean Monnet Professor of Public Policy, George Mason University; Mr. Marc Lackritz, President of the Securities Industry Association; Ms. Karen Shaw Petrou, Managing Partner of Federal Financial Analytics Incorporated.
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    All of you, thank you for your participation. And, Professor, we will begin with you.


    Mr. DINAN. Thank you, Mr. Chairman, members of the committee. I am honored to be here this morning to testify on procedural, political and institutional aspects of the Financial Services Action Plan. Thanks for having invited me and thanks to the staff for having organized this event.
    The commission adopted the Financial Services Action Plan in May 1999. It is, of course, part of the much larger goal of integrating the European Union economy, which is the main objective of the European Union. The committee's strategy was simple: to generate the political and institutional momentum with a package of approximately 40 measures and a deadline to achieve those by 2005.
    You may remember, Mr. Chairman, the famous single market program of the late 1980s, early 1990s. That set out a number of measures, approximately 300, to achieve a single market and a deadline of 1992. The Financial Services Action Plan replicates the single market program in its approach, although it is much narrower in its focus.
    The European Council, the Heads of State and Government endorsed the Financial Services Action Plan in June of 1999, which meant that they gave it added political momentum. And the incorporated the Financial Services Action Plan into the Lisbon strategy, which, as you mentioned this morning, Mr. Chairman, seeks for the European Union to become the most competitive and dynamic knowledge-based economy in the world by 2010.
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    Now I won't go into the legislative process in the European Union. You can find a description of that in my written testimony. Let me just say that it is extremely complicated and arcane. It takes me an entire semester to teach at the university. And I won't attempt to describe it to you in five minutes.
    Let me just say that the European Union was concerned that the momentum behind the Financial Services Action Plan was waning and that some measures were not being enacted rapidly enough and that the quality of those measures was poor. And for that reason, the commission and some member states asked a committee of wise men, chaired by Alexandre Lamfalussy, a very eminent European banker, to produce a report on progress in implementing the financial services action plan.
    The Lamfalussy report was critical of implementation on two grounds. Lamfalussy called, first of all, for a much greater consultation in the legislative process between the legislative actors, the commission, the European parliament, and the council, with industry, with interest groups and consumer groups.
    And the Lamfalussy report also called for speedier enactment of legislation. Not just the primary legislation, that is, the directives which are necessary to provide general guidance and framework for implementation of the plan, but more importantly perhaps for the so-called secondary legislation; that is the legislation needed to provide the detailed implementation of the financial services measures.
    The Lamfalussy proposal resulted in the establishment of two important committees with respect to the Financial Services Action Plan: the European Securities Committee, consisting of senior representatives of the commission of member states; and the European Securities Regulators committee, consisting of national regulators.
    Will the plan be enacted? And will the plan be enacted on time? Well, there is a huge difference between rhetoric and reality in the European Union when it comes to any policy area. Even with the best will in the world, proposals are not always drafted on time, deadlines slip and inter-institutional strains emerge.
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    Already there was a huge institutional battle between the European parliament and the commission on procedural aspects of the Lamfalussy plan, which delayed adoption of the Lamfalussy plan by the European parliament for an entire year. The European parliament only adopted the plan in February of this year.
    The main problem now, according to Lamfalussy, is lack of staff, a problem that I am sure is familiar to you here in Congress. In a recent article in the Financial Times, he expressed optimism generally about the procedures in place. But he said the main problem is a lack of qualified staff in the commission and in the relevant committee of the European parliament to get the work done.
    Thank you.

    [The prepared statement of Desmond Dinan can be found on page XX in the appendix.]

    Mr. SHAYS. [Presiding.] Thank you.
    Mr. Lackritz?


    Mr. LACKRITZ. Thank you very much, Mr. Chairman, members of the committee. I appreciate the opportunity to testify today about the implementation of the EU's Financial Services Action Plan. And I thank you and commend you for your timely review.
    As the professor said, the EU adopted this plan two and a half years ago. And I think it is increasingly important that the Congress, the administration and the U.S. financial services regulators become engaged participants in this critical European development.
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    The objective of the FSAP is to develop a single integrated EU capital market by 2005. Let me just say, we strongly support the implementation of this plan and would agree with the other witnesses that talked earlier this is actually a win-win for Europe. But more importantly, it is also a win for the United States.
    U.S. securities firms have long participated in Europe's capital markets. We have participated directly in the gains that have been made. And we and our customers expect to be the primary beneficiaries of a more integrated, efficient EU capital market.
    Our very largest members engaging in global business receive about 20 percent of their net revenues from Europe. And I might add that that is about two times more than the net revenues that we receive from Asia. And we employ about 35,000 Europeans in the business.
    Let me review briefly some specific measures in this plan that are of potential concern to U.S. securities firms and our clients.
    First, to get back to the issue that was raised by Treasury and also by the SEC in the earlier panel, the proposed financial conglomerates directive introduces group-wide supervision of financial conglomerates. We agree with the overall objective of promoting financial stability, but we have very strong reservations about some of the directive's provisions.
    We are specifically troubled by the proposal's requirements that EU supervisors of regulated EU entity owned by a firm outside the EU must determine whether the group is subject to consolidated supervision that is equivalent to EU regulation. Rather than using the equivalence approach taken by the draft directive, we believe the concerns addressed by the proposal should be met through regular dialogue among global regulators.
    U.S. and EU regulators have had an initial exchange of views on the supervisory issues raised by this directive, and we believe that continued dialogue will result in a more smooth transition to the new EU supervisory regime.
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    In addition, a new review of the investment services directive provides an historic opportunity for Europe's markets to create an environment for innovative, efficient, fair and internationally competitive markets, and we welcome this revision. The directive helps establish a passport which permits securities investment and trading services to be provided cross-border within the EU.
    The latest round of consultations has focused on changing market structures, such as alternative trading systems, and specifically concentrates on issues of, first, trade transparency in market conditions where transactions occur other than on traditional exchanges, and, second, appropriate regulation for order flow that is internalized by investment firms.
    We hope that the commission will produce a proposal for the new investment services directive that is targeted only at addressing existing gaps in an efficient single market and does not go out of its way to impose undue new regulatory burdens on Europe's capital markets and on participants like us.
    Third, the EU prospectus directive is designed to address the currently uncoordinated regulatory framework for approval of prospectuses where securities are to be sold in more than one EU member state. The most significant outstanding issue with respect to the directive relates to whether or not an issuer is able to choose in which member state its prospectus documentation is reviewed and vetted.
    Under the proposal, the current approach of requiring issuers to deal with only one member state where the securities are to be offered or traded would be replaced by an approach requiring the issuers always to deal with the member state in which they are organized, as well as where the securities would be offered. So they have a double-stop, basically, or redundant stops.
    The European parliament has accepted the need to preserve choice, however the council continues to prefer home jurisdiction. We hope the commission's revision, which is expected this summer, will preserve the choice issue.
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    Fourth, the market abuse directive is intended to restate the current insider dealing directive and create a new offense of market manipulation.
    Our concerns have focused on, first, the absence of an element of intent in the definition of the offenses, creating strict liability and raising the possibility of prohibition of current practices; second, proposed safe harbors which were not sufficiently extensive; third, failure to acknowledge that effective information barriers, such as we have in the United States, should constitute a defense to the principle of deemed knowledge; and fourth, the broad scope, which creates competing EU regulatory jurisdictions.
    We are particularly concerned that the lack of an intent standard will reduce the flow of information to investors in the market. Significant, albeit insufficient, amendments were made in the European parliament and the council where broad agreement on the proposal has been reached.
    Finally, though not part of the plan, the financial services industry has sought an adequacy determination from the EU so that flows of data between the U.S. and the EU are not subject to potential data stoppages. We commend you, Mr. Chairman, and your colleagues on the committee for sending a letter last year that supported a determination of adequacy for the U.S. financial services industry for purposes of the EU data protection directive.
    We are also quite pleased that the Bush administration has begun a discussion with EU officials and will be seeking an adequacy determination in the course of that dialogue.
    The U.S. privacy regime reflects a careful balancing of the needs and interests of consumers, financial institutions, government, and the specific economic and security interests of the United States. The export of European privacy standards to the threat of transatlantic data stoppages creates a very dangerous precedent and one that should be strongly resisted.
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    The U.S. securities industry plays an important role in EU capital markets and we are fully committed to the integration of the EU's capital markets. We look forward to working with the U.S. and the EU on a positive economic agenda to ensure that European capital market liberalization is achieved in a nondiscriminatory manner that is transparent, efficient and protects against risk.
    Again, we very much appreciate the committee's serious interest in the deepening relationship between the U.S. capital markets and those of our closest trading partner, the European Union.
    Thank you very much.

    [The prepared statement of Mark E. Lackritz can be found on page XX in the appendix.]

    Mr. SHAYS. Excuse me, is it Ms. Petrou?
    Ms. PETROU. It is.
    Mr. SHAYS. Thank you.
    Ms. PETROU. I have been married seven years, but it is taking a while.
    Mr. SHAYS. So let's figure out, that name Karen Shaw is?
    Ms. PETROU. Earlier.
    Mr. SHAYS. Okay. Very good. We will take it off.
    Thank you. You have the floor.
    Ms. PETROU. Thank you so much.
    Mr. SHAYS. It is nice to have you here.

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    Ms. PETROU. Thank you.
    I am Karen Shaw Petrou, Managing Partner of Federal Financial Analytics. As a firm, we advise financial services firms, and indeed several governments, as to policy issues affecting the financial services industry. We do not represent any companies or clients before the United States Congress or the European Union.
    I, too, would like very much to thank you and Ranking Member LaFalce for holding this hearing today. It is so unusual for the Congress to be looking in 2002 at an issue that may not really demonstrate its full competitive impact until 2010. The hearing is an important step not only in ensuring that U.S. policy interests are understood, but also helping the industry take this emerging Financial Services Action Plan seriously.
    Companies tend to think quarter by quarter, and 2010 seems a long way out, but these issues are very significant, and preserving the fair competitive position of the United States in this critical industry sector is an important national priority.
    The Financial Service Action Plan is a very important and quite worthwhile effort in the European Union to eliminate idiosyncratic and anachronistic rules that have impeded the ability of the financial services industry in the EU to serve consumers and corporations. Many of the reforms under review, particularly those in the pension area, for example, could result in significant improvements that benefit the EU and therefore also the United States.
    However, I would like to summarize a number of issues that pose some significant competitive problems, and I believe these problems arise in part because our financial services industry is very significantly different than that of the EU.
    My written testimony includes some statistics bearing this out, but I would like particularly to point to the fact that in the European Union banks are by far the dominant providers of financial intermediary services. In other words, they take money from savers and depositors and they turn it into the resources that support economic development. In the EU, in several countries, banks' assets are more than 3 times the national GDP.
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    In the United States, banking assets average about 70 percent of our GDP. We have a much more balanced structure between banks, securities firms, insurance companies and pension funds in our business of taking funds from all of us and turning them into the assets that promote all of our interest, and we have a very different regulatory structure as a result.
    Attempting to force the European banking structure into an international financial regulatory one will create some significant problems for the United States. Chief among these, I believe, are pending in the capital rules and in the conglomerate regulation already discussed by several witnesses.
    The capital rules are under development by the Basel Committee on Banking Supervision, and this is a panel on which U.S. regulators sit. But negotiations are proceeding in a way that could put the competitiveness and, indeed, the safety and soundness interests of the U.S. financial system at risk.
    One key concern is a proposed new capital requirement on operational risk. This is the risk of systems failures or even man-made attacks, such as the one on September 11. The proposed operational risk-based capital framework in the EU will apply to banks and non-banks alike because the EU has the legal authority to do that. In the United States, it will apply only to banks, even though non-bank asset managers, and payment processors are very major participants. This could create some significant market distortions and even some safety and soundness issues, so I think this needs to be carefully considered.
    Pending rules on asset securitization are also problematic. European banks are far less competitive in this emerging and important market where loans are turned into securities, thereby creating new funds for lenders to make more mortgages, more car loans and more funding available to borrowers across the United States.
    Our technological innovation has spurred this market, and the European institutions have generally been slower to follow it. They are therefore proposing much higher capital charges on asset-backed securities than on the whole loans that comprise them, and this poses a significant competitive risk.
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    Mr. Lackritz and the first panel have discussed the conglomerate rule, so I won't go into that, except to echo the concern that this is a bank-like structure. Congress established the financial holding company structure in the Gramm-Leach-Bliley Act, and it was intended to form a framework in which banks, securities firms and insurance companies could combine in a single company.
    Since Congress passed that law in 1999, only four non-banking companies have become financial holding companies, and the reason for that is the fact that the financial holding company structure superimposes bank capital rules and a bank regulatory framework on the securities and insurance industry in ways that are often inappropriate. Allowing the EU conglomerate regulation to reach across the Atlantic and do that raises some very significant issues and warrants careful attention.
    Finally, I would like to mention the importance of how the United States is represented in these negotiations. Congress modernized its consideration of the financial services industry under your leadership, Mr. Chairman, by creating a Financial Services Committee in this Congress.
    However, trade and financial services is still split among many different agencies in the United States government, and no one is really responsible for it. This makes it very hard for the industry to find a keen advocate with the necessary degree of technical knowledge in these highly specialized industries to present a unified position in these highly complex negotiations.

    [The prepared statement of Karen Shaw Petrou can be found on page XX in the appendix.]

    Mr. SHAYS. Ms. Petrou, let me interrupt you here. Thank you.
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    I just want to get a sense. We have one vote, that is the bottom line. I don't think we can go through all the questions.
    Do you have questions, Mr. Shadegg, that you want to ask?
    So I think what we will do is do you want to just go through yours? Are you going to come back?
    Mr. LAFALCE. I think it is going to be difficult.
    Mr. SHAYS. Okay, here is what I am going to do. I am going to stay while the ranking member can ask some questions, unless—excuse me, I was next in line. I will just go with the ranking member. You can ask your question, and then I will stay, and then we are going to have you come back.
    So we are going to come back afterwards, if anybody wants to come back and ask a question.
    Mr. LAFALCE. I thank the chair for his generosity. I will defer my questions. I can speak with the representatives personally over the phone. I thank the chair.
    Mr. SHAYS. I am willing to wait.
    Mr. LAFALCE. No, I want to let you go ahead.
    Mr. SHAYS. Does someone want to ask a question now before we go and not come back?
    Mrs. MALONEY OF NEW YORK. I will.
    Mr. SHAYS. Okay, Ms. Maloney.
    Mrs. MALONEY OF NEW YORK. I am very concerned about protecting American interests, American business, American financial institutions. And in your testimony, you have pointed out how our capital markets are so much larger than our European sisters' and brothers', and I would venture to say it is because they are well managed and that people trust them and they want to invest in them.
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    And I, for one, find it problematic that Europe is going to come over and preach to us on our accounting standards. We have had strong accounting standards, and the fact that there is one company that has been mismanaged does not speak to the overall strength of the American markets. And I really want to know what we are doing, steps we are taking, to make sure that in all these international agreements that our financial institutions and the businesses in America are not put at a disadvantage.
    I found Ms. Petrou Shaw's testimony troubling when she spoke about the fact that in the so-called Basel accords the capital requirements will be putting our banks at a disadvantage, or our financial institutions at a disadvantage, their capital requirements are lower.
    And then the comments of Mr. Lackritz, when you were mentioning how in the privacy situation the fact that our European sisters and brothers, with their standards, are creating ''a dangerous precedent in data stoppages.'' So I am concerned that some of these international standards that they are putting out there may have the effect of putting our very strong, high-performing capital markets at a disadvantage.
    And I guess this is a question I probably should be asking the Fed or the Comptroller, what steps are we taking in our overview to make sure that our businesses are not put at a disadvantage, and our financial institutions?
    But Ms. Shaw, you mentioned several areas where these so-called accords would put us at a disadvantage.
    Ms. PETROU. I think that is a concern. And part of it is the lack of unity in the United States' position with the EU where they have one negotiating team and we have many.
    Mrs. MALONEY OF NEW YORK. But if their capital standards are lower than our capital standards, and we in this country want a higher capital standard, then our financial institutions are at a disadvantage.
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    Ms. PETROU. Yes, that is correct.
    Mrs. MALONEY OF NEW YORK. So, I am concerned that as we move to globalization—we are at globalization. But quite frankly, I was stunned at the statement at how much larger our capital markets are than the entire European capital markets. We are, double the size, and I never realized that before.
    So I would say they should be coming over here and learning a little bit from us, not coming over and trying to make us change all our standards to theirs.
    Ms. PETROU. Yes.
    Mr. LACKRITZ. Can I respond, Congresswoman?
    Mr. LACKRITZ. First of all, I thank you very much for that kind of support. I think that is the kind of support that we would welcome in these negotiations.
    I think that some of these directives—for example, like the financial conglomerates directive that I spoke of, and that the members of the earlier panel spoke of, and the privacy directive, and the directives that Ms. Petrou discussed, are good examples.
    And I think what we need here is we don't need regulatory imperialism coming at us from Europe. What we need is a dialogue to ensure that we have a race to the top, to ensure that our firms are allowed to compete fairly, openly and on a nondiscriminatory basis. And that is what we are trying to do in course—and I think in these kinds of hearings, we are able to present the kind of information that hopefully you, as the oversight committee, and the administration will be able to take into the negotiations and strengthen our negotiating position with respect to the Europeans. Because I think you are absolutely right.
    Mrs. MALONEY OF NEW YORK. Well, we have to run vote. But I would like to see what steps our government, or our not-for-profits, our institutions, are taking to make sure that our firms, our industries are not put at a competitive disadvantage. You know, they may present, you know, ''Here is our standard.'' Then you find out that their standard basically creates a data stoppage for any processing in our country. Now, is that really a better standard, or is that an effort to give them a competitive advantage?
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    So I think that we have to really look at these things. You know, the new war is really an economic war in many ways.
    Mr. SHAYS. Let me just let Mr. Dinan just make a response. Then I really want to close up.
    Mr. DINAN. Well, my response would be that I appreciate your concerns, Congresswoman. I think they may be exaggerated, however, because Europeans are trying to learn from the United States. The whole point of the Financial Services Action Plan is to make the European Union more like the United States.
    If you look at the strategic objective of the European Union, the European Union seeks to become, by 2010, the most competitive and dynamic knowledge-based economy in the world. In other words, with whom do they wish to compete? The United States. Whom do they wish to emulate? The United States. Europe is becoming more like the United States in economic terms.
    As I said, I appreciate your concerns, and on specific issues they may be warranted. But overall, I think they are exaggerated.
    Mrs. MALONEY OF NEW YORK. Well, again, I would request in writing from the panelists what steps are being taken that you know of, or what steps would you suggest that our negotiators look at to make sure we are not being put at a competitive disadvantage.
    Mr. SHAYS. We need to vote here. I am sorry to have you come back, and I am sorry for the ins and outs and all the votes and all that. You all have been patient. You are aware of what goes on here. But we do have some questions we all want to ask you. So we are going to ask you. The first member who gets back, I am just going to empower them to start the meeting.
    Recess until a member gets back. So it will be less than 10.
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    Mr. SHAYS. The committee is called to order. Thank you for your patience and waiting.
    Unfortunately, in this committee, I have to expose my ignorance. I haven't been a member very long. But out of my ignorance, I learn a lot.
    And my simple mind tells me that the Europeans basically want to know what the United States does. As we the United States united our states, they are uniting their countries to have one basic system. And just as I wouldn't want them to tell us what to do, they probably don't want us to tell them what to do.
    But, in fact, my first question is in this new environment of world competition, the fact is that—and I would ask each of you—in order for us to work together, we have to tell each other what we want and what we don't want. And I want to know if that is true. And then the next is, I want to know what leverage we have. And I want to know why they would care what we think. I realize we are an economic force but ultimately why won't they do whatever the heck they want to do?
    Mr. SHAYS. Mr. Dinan, when you speak you have such an accent I kept thinking you were speaking for Europe, but—
    --but in this concept if all three of you would share with me what you think.
    Mr. DINAN. Well, if I could begin, you are right. And this was the gist of my remarks to Congresswoman Maloney, that the European Union to a great extent wants to replicate the United States, certainly economically. The European Union realizes that in this global economy and global environment, countries the size of the European countries even countries as large, by European standards, as Germany, the United Kingdom and France can't act alone. In order to be competitive, in order to be successful, they have to integrate. And the greatest model of economic integration and political integration is the United States.
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    And that is why they want to replicate the United States' tremendous economic achievement, especially recently in terms of increasing productivity and in terms of increasing jobs, because Europe is still plagued by relatively high unemployment and poor productivity.
    But the European Union does not want to do this at any cost, because the European Union also wants to maintain what it sees as an extremely important aspect of European integration, that is solidarity and social cohesion. The European Union wants to maintain a relatively high social security safety net, much higher than in the United States, for instance.
    So there are differences in the approaches and in the objectives.
    The European Union, I think, wants to learn from the United States. And I presume the United States wants to learn from the European Union, because each has so much to offer the other.
    And when we think of relations between the United States and the European Union, perhaps we think too much in traditional terms of intergovernmental relations. Because the relationship exists at all levels. There are networks, business networks, congressional networks, of course governmental networks, private sector networks, that are dense across the Atlantic and that are constantly exchanging information and exchanging knowledge.
    Finally, why would the European Union not like to go it alone? Mr. Chairman, I am sure you are very familiar with the criticism which the European Union makes at the moment of the United States, which is that the United States is, in the view of the European Union, too unilateral.
    Europeans don't like unilateralism. Europeans like multilateralism. They like institutions and organizations that are multilateral. They like to learn from each other.
    The whole process of integration, the whole process of bringing 15 countries, soon to be 25 or 27—
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    Mr. SHAYS. Could I just interrupt you there?
    Mr. DINAN. Yes.
    Mr. SHAYS. The irony of that is I think of the European Union as one unit. So when they agree among themselves they think like they are multilateral, and I think they are unilateral in the sense that they then are this unilateral block that then wants to—so I mean, I guess I am just sharing a little bit of a bias. The French, they talk to the Germans and the Brits say they are multilateral. But if New York state talks to Connecticut and talks to California, that is not multilateral, obviously.
    Mr. DINAN. Right.
    Mr. SHAYS. So I am making the same comparison.
    Could close up in a second and let Mr. Lackritz respond as well? Could you finish your point?
    Mr. DINAN. Yes.
    Mr. SHAYS. Do you want to make another point?
    Mr. DINAN. No, I am going to leave it at that. Thank you very much.
    Mr. SHAYS. I appreciate the answer. It is very helpful.
    Mr. Lackritz?
    Mr. LACKRITZ. Yes, thank you very much Mr. Chairman.
    I think the question you raised is exactly the right question as we go into globalization discussions and negotiations. Because I think that we have to be very careful that there isn't a race to the bottom out of competitive concerns that weaken standards and lowers requirements. And at the same time, we have to take into account the political and cultural differences and the sensitivities of our trading partners and our potential partners around the globe.
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    So I think the question you raise is exactly right. I think I would differ a bit with the professor's point, in that I think the Europeans do want to learn from our experience and are trying to emulate the experience we have had over here. However, in a couple of specific areas, whether it is because of political differences or cultural differences, they really are trying to impose on their trading partners, meaning us, the standards that they have evolved for their own internal reasons or for their own internal political reasons. They are very different from the standards that we have here and culturally are very different too, whether it is from the standpoint of pension system or from the standpoint of privacy or from the standpoint of consolidated supervision.
    In those circumstances, I think it is important for our negotiators to be strong on behalf of U.S. financial services providers and also talking to our partners about how it is a win-win situation. For them to cut off data, for example, as a result of pique at our privacy rules, really only hurts their own investors, their own companies and their own ability to attract capital since we have the largest pool of capital in the world.
    So I think we have to try and do an effective job of helping people understand what is in their own best interest and at the same time in our best interest in creating win-win situations.
    Mr. SHAYS. Just refresh me, one of you—and then Ms. Petrou we will go to you—what is the gross domestic product of that entire EU group versus the United States?
    Mr. LACKRITZ. My recollection is their GDP is in the order of $330 billion. And our is not significantly a little bit higher.
    Mr. SHAYS. You don't mean billion.
    Mr. LACKRITZ. Trillion, excuse me, I am sorry.
    Mr. SHAYS. You were giving me population, then, weren't you?
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    Mr. LACKRITZ. I confused the population. Excuse me.
    Mr. SHAYS. Listen, I may be a new member to the committee, but I did see through that. You are just testing me.
    Mr. LACKRITZ. No, the GDP for the United States is $10.5 trillion and for all the European countries it is a little bit less: $7 trillion plus.
    Mr. SHAYS. Right. But a larger population.
    Mr. LACKRITZ. Yes, a comparable population.
    Mr. SHAYS. Ms. Petrou, did you want to jump in?
    Ms. PETROU. No, but I think that, looking at the GDP numbers, which we tried to do as a way of just evaluating on a country-by-country or EU versus U.S. the different structure of the financial industries. The percentage that the banks control of assets in relation to European GDP, as I said, is much, much higher than the banks in the United States. And there are many fewer banks, very dominant providers of all financial services in the EU.
    We have, for better or worse, a very different system. We have 50 states regulating insurance. We have 9,000 banks. We have 16,000 institutions that have access to the Federal Reserve payment system.
    And the European Union, I think, views this as a very inefficient, troublesome system. And they are saying in some ways, ''If you are coming to the EU, well, do business the way we understand it.'' But while we could improve certain aspects of our financial markets, as Mr. Lackritz was saying, to impose that across the Atlantic does raise concerns because fundamentally, our diverse, confusing, overlapping regulatory structure and chartering options have made the United States financial services industry the most competitive in the world.
    Mr. SHAYS. Let me ask you, does it also make it harder—I am sorry, and then I will get to Ms. Hart or Mr. Shadegg, whichever wants to go next—does it make it harder for foreign competition to compete in the U.S. market? Is it one way we are almost able to protect industries and discourage competition?
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    Ms. PETROU. We have had a national treatment policy which, with occasional disputes, has been very effective.
    For example, the European Union and the European countries have long permitted their banks to be in a wide range of businesses, including owning significant amounts of commercial shares that are impermissible in the United States. We have always said to the European financial companies, ''Come to the U.S., you just have to do business in the U.S. our way, i.e., observe our limits within the banking industry.''
    Mr. SHAYS. Right. But I was asking something a little bit more than that. I was asking about the fact that many times U.S. businesses are having to adapt to state regulations, state rules, state process. Is that a further discouragement, or does that discourage foreign markets from entering? This doesn't need a long answer. If it doesn't, it doesn't. If it does, it does.
    Ms. PETROU. I don't think it does any more than it discourages U.S. issues. The question is not one of national—in trade and financial services, it is a question of market efficiency.
    Mr. SHAYS. Mr. Lackritz, did you want to respond?
    Mr. LACKRITZ. Yes. I am not sure it has a deterrent effect on foreign investment in the United States. But we have a problem when we have 50 different state securities regulators, for example, going off in different directions.
    Mr. SHAYS. I know it is difficult for the U.S. businesses to deal with. I would think it would just make it a little harder for foreign businesses to deal with.
    Mr. LACKRITZ. It may. The data, as I recall, are that there are 67 European-centered banks that are doing business in the United States now. And there are 22 or 23 U.S. institutions doing business in Europe. So my sense is that that is probably not a big deterrent at this point.
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    Mr. SHAYS. Okay.
    Mr. Shadegg, you were technically next in line, but you didn't get back first. So I have this problem of how to know to what to do. So I am going to give you 10 minutes.
    Mr. SHADEGG. Ten minutes? I don't know if I will use 10 minutes, but let me begin; I have a variety of questions. I want to begin with the capital adequacy directive and its implications for the United States and for U.S.-based companies. And you say in your testimony that they propose to impose a new capital charge for operational risk. I am very concerned about the effect of all of this on the U.S. markets and U.S. jobs and on our competitiveness in the world.
    But given the relative size of the two capital markets, I guess I am somewhat curious how they will impose this, the charge for operational risk, and how you see American companies, or U.S.-based companies responding to that.
    Ms. PETROU. The current proposal in the Basel Committee offers three different options for how the operational risk-based capital charge would be imposed. And U.S. regulators have fought hard for one that relies on internal models of operational risk, where the EU is much more determined to impose what they call a basic indicator, which would mean that the operational risk-based capital charge would be a simple about 20 percent of gross income. And then through first the Basel Committee and then implemented through the EU capital adequacy directive, that would be the amount of capital the European banks and non-banks would have to hold against operational risk.
    Mr. SHADEGG. That would, in fact, be damaging to U.S. interests, would it not? Or would it?
    Ms. PETROU. It very well could be because in the EU market, we would be bearing that charge as well as a supervisory burden, and there are some significant market entry issues that are raised by that.
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    There are also profound issues in the United States where a U.S. bank in, say, the asset management business would have to hold a large amount of capital against operational risk, capital that would probably bear no real relation to the economic risk because it was set by the EU in this crude way. But all the non-bank competitors in the same line of business would be exempt from that capital charge.
    Mr. SHADEGG. Are there things that the United States Congress should be looking at doing so that U.S. interests are not, in fact, hurt by such a charge?
    Ms. PETROU. I think we are all hopeful that the Federal Reserve and the other U.S. regulators will work out this agreement so that the competitive and safety and soundness issues are addressed. But if this is not possible, then I would hope that Congress would look into it.
    Mr. SHADEGG. Mr. Lackritz, to that point, you have been working with the interests in Europe on these issues. I guess my question of you is how receptive are they, and is this something that we in the Congress need to be somewhat concerned about, deeply concerned about? Where would you put it?
    Mr. LACKRITZ. Well, first of all, I appreciate your question. And I think we would like you to be engaged and concerned, because this is a process that, sort of, ebbs and flows. And in some areas, we make progress and then in other areas we are less successful.
    What we need, I think, and the administration has provided a good start on this, is a continuing dialogue with the EU regulatory officials and governmental officials, and ability to stress how our own laws are adequate or equivalent as the case may be. And so as a result, we appreciate both your engagement, oversight and support to encourage our negotiators to adopt these kinds of positions.
    Mr. SHADEGG. Have the Europeans been receptive at this point, or are they resentful of America's structure?
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    Mr. LACKRITZ. I think the answer is yes.
    Mr. SHADEGG. They have?
    Mr. LACKRITZ. No, it is both. I mean they have been receptive and I think there is some resentment.
    Mr. SHADEGG. Do you see a potential for an effect on jobs or on our competitiveness in the world market rising out of this?
    Mr. LACKRITZ. I think there is an impact on jobs and financial services to the extent that we are restricted unnecessarily from competing in Europe. From the European standpoint, there is the impact of reduced economic growth because they are not going to be able to attract as much capital as they might want to attract.
    As Ms. Petrou said, they are very bank-centric in Europe. They have been very bank-centric historically. Our capital markets and our diverse financial services industry is very, very different from that and has produced a very different pattern of economic growth and development.
    And I think the professor's point that they are looking at us as a model for what they want to do means that they are trying to emulate some of the processes that we have done. But I think that we are in the process of, as we negotiate, trying to explain to them the benefits of openness, transparency, non-discrimination and those kinds of things.
    Mr. SHADEGG. I don't want to go over my time, but maybe either you or the professor could answer this question. It seems to me that it is in our interest to negotiate in an open and forthright way between now and then. But it also seems to me that if they remain arbitrary, and if they impose requirements which do damage, there will be American companies, or American-based companies that will simply say, ''We, in fact, will pull out. We will not meet your demands.''
    And it seems to me it is a little bit like the gamesmanship we sometimes play on the floor of put a rule out on the floor and you don't know if the rule is going to pass because you don't have 218 members that say ahead of time they are going to vote for it, but you, kind of, call their bluff. And at the end of the day they vote for it.
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    And it seems to me that if requirements are imposed upon us that are arbitrary or would be damaging, the real pain will be inflicted on the European economy, as you point out, by us pulling out.
    Professor or either one of you, if you want to make a comment on that?
    Mr. DINAN. If I could comment, first, Congressman, in my testimony I mention that there is a reform procedure called the Lamfalussy program.
    Mr. SHADEGG. Yes.
    Mr. DINAN. Mr. Lamfalussy is a very eminent European banker, a former head of the European Monetary institute, the precursor of the European Central Bank. And the commission and member states asked him to look at the Financial Services Action Plan. They felt that there were problems and Lamfalussy agreed that there were problems. There were procedural problems.
    But a main problem that he identified, and therefore the main recommendation that he made, was that there be more consultation. And in that recommendation, which has since been implemented, he did not distinguish between people within the EU and outside the EU who could or should be involved in this consultation procedure.
    And now there is much greater consultation in both primary legislation and also in secondary legislation. And I think and I presume U.S. interests are involved in that.
    Obviously, the U.S. does not have a seat at the decision-making table. But the U.S. is a major player and U.S. interests are, I think, represented. And I know that the U.S. mission to the European Union is watching these issues very closely.
    Mr. SHADEGG. Thank you all for your testimony.
    I yield back the balance of my time.
    Mr. SHAYS. I thank the gentleman.
    Ms. Hart?
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    Ms. HART. Thank you, Mr. Chairman.
    I only have one question that may actually have missed some of you and so if I repeat it, I apologize.
    As this continues, I don't see any reason for us the United States to feel threatened in any way. And I know some of the earlier testimony suggested that this is a great opportunity, obviously, for American financial institutions. But is there something that Congress should be doing—this is really a question, I guess, for all three panelists—to help the U.S. institutions be more prepared to compete in this new market place?
    Ms. PETROU. I think monitoring, as you have, the ongoing effort in the Congress to modernize and improve U.S. financial regulation and also to improve the structure of the industry to make us even more efficient and competitive. And to the degree the committee continues those initiatives, that will be the best way to promote U.S. interests in the EU.
    Mr. LACKRITZ. The committee last year sent a letter, I believe it was to the Treasury secretary. It was signed by a number of members of the committee, urging the Treasury in its negotiations with the EU to push for an adequacy determination of our privacy laws. And it is that kind of support and cooperation, I think, between the branches of the government and policy and, sort of, unified support of the policy that is very, very helpful to our negotiators. And therefore, to our U.S. interests over there.
    So in all these areas where there are problems that we see in this process, getting support from the committee to our negotiators, and therefore, showing the Europeans that we are very unified on this, is very helpful.
    Mr. DINAN. I would say a hearing such as this is very encouraging. And I hope it will be reported in Brussels and in the relevant newsletters. And that will get the attention of the Europeans, the fact that the United States is aware of this issue.
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    I think the CODEL, which Congressman Oxley led, was very important. It is easy to bash CODELs, we know. I think that particular CODEL was so timely and so relevant. And similarly, the return visit of the officials of the commission. And the fact that there is an active negotiation and interchange taking place is very important.
    Ms. HART. Thank you, Mr. Chairman.
    Mr. SHAYS. Thank you very much.
    Mr. Shadegg, do you have any other questions? I have a few more and then we will conclude.
    Mr. Lackritz, you talked about why the private sector is concerned about some aspects of this plan. But I would like to know how U.S. firms will be placed at a disadvantage if all firms operating in the EU are subject to the same rules. What would be some of the disadvantages?
    Mr. LACKRITZ. Well, the disadvantages that we referred to depends on the directive. If we take them directive by directive, for example, on the investment services directive where they are now in the process of reviewing that directive to determine how broad a passport to provide in providing investment services throughout the EU. They are beginning to look at how to control or regulate off-exchange transactions, what we would refer to in the United States as either internalization, alternative trading systems, electronic communications networks and the like.
    We are very sophisticated, in terms of developing those kinds of facilities. There are currently 12 or 13 electronic communications networks, for example, operating in the United States. There is a regulation of the FCC providing for alternative trading systems.
    To the extent that that directive veers off because of the interest of a European exchange, for example, to try and block competition from that European exchange, our firms who own these electronics communications networks would be severely disadvantaged.
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    Similarly, with respect to the data protection directive, that is not a question of playing by the same rules, that is a question of trying to play by—with respect to data transmissions, that is imposing a set of privacy regulations and legislation on the United States that is very different than what the Congress, in the Gramm-Leach-Bliley Act, decided to impose on the United States firms.
    So we would again be disadvantaged. Our customers would be disadvantaged. And actually Europe would be disadvantaged because they would at least threaten to block data flows out of Europe to the United States. And that would end up hurting, I think, the Europeans far more than it would hurt us. But it would diminish our ability to compete.
    So, I think in each of these areas there are specific examples of how we might be disadvantaged depending on the direction that the directive would take.
    Mr. SHAYS. Okay. And then, actually, it just triggers this question, though. So is the onus on us to get them to try to work out an agreement, a compromise with us, or do we have to change what we do?
    Mr. LACKRITZ. Because I think there is broad agreement that our financial services industry and our markets and our capital markets are really the best in the world right now, we would hope that they would be able to, as the professor said, try and emulate us and move a little bit more in the direction of the openness, transparency and non-discrimination that we have been advocating.
    Mr. SHAYS. Just one last question to you: You had stated the SIA has worked closely with the European commission and the national regulators. And I am interested to know how receptive have the Europeans been to American advice and concerns?
    Mr. LACKRITZ. I think in some areas they have been receptive and there has been great progress made. And in the other ones, I think that we have outlined here, there is still some work to do. So I think it is obviously a work in progress.
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    As I said, we are very supportive of their Financial Services Action Plan and we are very optimistic that the single integrated European capital market will be a win-win. It will be a win for Europe. It will be a win for the United States. But we will have a little work to do to get there.
    Mr. SHAYS. Okay.
    Ms. Petrou, according to your testimony the Financial Services Action Plan will generally make Europeans more efficient, in fact, far more efficient to use your word. Are there any elements of the action plan that the U.S. could use to make our system more efficient? It is, kind of, partly the question I asked Mr. Lackritz.
    Ms. PETROU. I think there are areas where a federal standards—and I know this is a significant issue for this committee in terms of federal preemption and consumer standards like predatory lending and privacy. Many changes in terms of making the financial market in this country more uniform would undoubtedly improve efficiency.
    But we have a national tradition of liking to preserve local jurisdictions, which is very different than the EU one. So I think we have a very different balance to maintain.
    Mr. SHAYS. Okay. I have this general sense that the Europeans clearly allow—I mean a very real sense, the Europeans allow their banks to do so much that we don't allow here. But I am also getting the sense that there is greater regulation on the banks overseas. Is that true as well?
    Ms. PETROU. That is true.
    Mr. SHAYS. Okay.
    Ms. PETROU. I am sorry, you said lighter regulation?
    Mr. SHAYS. Greater.
    Ms. PETROU. Oh, no, no. I am sorry, Mr. Chairman. It is generally lighter. It is quite different.
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    Because there are far fewer banks of size in each one of the European countries, there is a much more collegial system of bank regulation. For example, there is no examination. Supervisors generally do not go into the banks. Instead, the banking executives and their outside auditors are called in and then asked to describe their operations. It is a quite different system.
    Mr. SHAYS. This is the question my staff wanted me to ask. And I am not quite sure I grasp it. I may ask them to jump in. But maybe you will grasp it and we can have the dialogue.
    In your testimony you discuss the dominant role of the banks in the EU and the long tradition of bank regulation. That is the phrase that confuses from the question and says ''Do you foresee the emphasize changing with the Financial Services Action Plan? Will this need to be changed in order for the EU to become more competitive?''
    But based on your answer, there isn't a lot of regulation. So I am not sure there would have to be much change on their part. Is that the answer?
    Ms. PETROU. I think the goal of the FSAP is to harmonize the different traditions of bank regulation within the EU, but not in any way to make it comparable to our system where we depend, as I mentioned, extensively on supervision as well as capital, and in addition, on a tremendous amount of disclosure.
    Now there is an overall effort to harmonize bank regulation through the Basel Committee and the Joint Forum, which are groups of international regulators. But this is still proceeding in lots of fits and starts.
    Mr. SHAYS. Could you turn to your statement on page four where you have the graph?
    Ms. PETROU. Yes.
    Mr. SHAYS. Could you turn to that and just walk me through it?
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    Ms. PETROU. I would, but I am mostly blind, Mr. Chairman.
    Mr. SHAYS. Oh, I am sorry.
    Ms. PETROU. So I will have to do it in my head because I can't see it.
    Mr. SHAYS. Okay, I didn't know that. And your testimony is very well delivered and very thoughtful. So I wanted to take advantage of your extraordinary expertise.
    You said, ''As it is shown, relative difference in the role of banks can be seen by comparing bank held assets to a country's overall economy.'' And so you show insurance, you show pensions, you show investment funds and you show banks.
    Ms. PETROU. Yes.
    Mr. SHAYS. Is this within their own countries?
    It is a comparison with the EU, and Japan and so on.
    So what we had interpreted from that is they had more regulations rather than less. But is it possible that they have more regulations, but simply don't enforce them the same way?
    Ms. PETROU. I think perhaps the testimony is not well phrased. They have had for many years in the EU what they call universal banking. And so the very few dominant financial institutions, going back several hundred years in some cases, were the institutions that became investment houses, and that also owned significant portions of the industrial base of those countries.
    For example, Deustche Bank has had major industrial interests in German companies since the end of the Second World War.
    Mr. SHAYS. You know, this isn't really regulation as much as the percent of the gross domestic product. And so it is really just saying banks both in the EU and in EU 15 and EU 11 are extraordinarily dominant in their economies compared to the U.S. and Japan. And so I understand the context of your question then.
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    Thank you. Sorry to show my ignorance on that.
    Mr. Dinan, I would like to ask you three questions. You are clearly an expert on European government institutions. The committee would like to know, who has been the driving force behind the Financial Service Action Plan. And how successful do you think they will be in implementing this plan? So who has been the driving force in Europe?
    Mr. DINAN. I think the driving force has come from within the EU institutions themselves and outside it. Within the EU institutions, the main driving force is the directorate general for the internal market in the commission. And the commissioner with responsibility for that is Frits Bolkestein, who is a senior Dutch politician and an economic liberal. So he is ideologically very much in favor of market liberalization and is pushing through market liberalization within the commission.
    Mr. SHAYS. When you use the term ''liberalization,'' just so I make sure I understand it, in other words, do they want to let the market forces work for themself?
    Mr. DINAN. Yes.
    Mr. SHAYS. They are not liberal in terms of more of a social—
    Mr. DINAN. No. Bolkestein comes within the Netherlands from the right wing of the political spectrum on economic issues. He is an economic liberal. Not on social issues, I am sure, but economically he wants deregulation and further liberalization.
    Mr. SHAYS. Got you. Is there any particular countries that have been the driving force behind—
    Mr. DINAN. Yes. Some of the countries have, especially some of the bigger countries. France, for instance, the U.K., although the U.K. has certain concerns, and Germany too.
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    It is significant, for instance, at the moment the country in the presidency of the Council of Ministers is Spain and the Spanish prime minister is also an economic liberal. He wants deregulation. He wants market integration. And so there is an interesting conjunction right now of a strong commissioner pushing for this and a strong country and a large country in the presidency headed by a prime minister, Mr. Aznar, who is well respected, who is very experienced. And that is why I think that there is a considerable push right now for the implementation of the action plan.
    Mr. SHAYS. My stereotype of the French, frankly, is that they, kind of, want to go it alone. And yet you are saying they are trying to bring Europe together on this issue.
    Mr. DINAN. Yes. France has been a major player in European integration generally because France realizes that it cannot achieve its objectives alone. And it is trying to Europeanize France; to Europeanize and integrate the European Union along French lines that is consistent with French interests.
    Mr. SHAYS. Yes, I understand, well said.
    Mr. DINAN. But you are right in your perception because generally the French are protectionist. But on this particular issue, the French do not have very strong national interests to defend.
    Mr. SHAYS. Okay, let me ask you this: Is the Financial Service Action Plan one of the, say, the strongest initiatives that the EU has undertaken? How would you rank it in terms of other agreements that they have tried to—
    Mr. DINAN. Well, in my testimony, I mentioned the single market plan of the late 1980s, early 1990s. That is when the European community, as it then was, set itself a goal of achieving an integrated single market by 1992. Clearly, the European Union did not succeed in all of that otherwise there would not be a Financial Services Action Plan. The reason for this plan is that the European Union feels it didn't achieve that aspect on time. And also circumstances have changed and the technology is such that the European Union concept needs to legislate more.
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    And so compared to the single market plan, this is not as significant, but it is important nonetheless.
    But the two big issues on the agenda of the European Union at the moment are enlargement, the enlargement of the European Union, and the possibility of a constitution for the European Union.
    Mr. SHAYS. Well, that relates to my last question to you. Will the enlargement of the European Union affect the implementation of this plan?
    Mr. DINAN. Yes, it will effect everything. The enlargement of the European Union is going to make the European Union much more difficult to run and to operate.
    Mr. Chairman, if you think of this room, if you compare this to a similar room in the European parliament, a committee room in the European parliament, just imagine that by doubling the size of the European Union, the size of this committee would double.
    But not only that. Here you operate in only one language. Currently, the European Union operates in 11 official languages. And with enlargement, even more. And that means that the sides of this room, or its equivalent in Brussels, is full of interpretation booths.
    So if you look at just that rather mundane level alone, making decisions in the European Union, which already is difficult, is going to become even more so.
    And that is why I mentioned earlier, one of the main agenda items for the European Union is to reform, not just the institutions, but the entire entity in order to be able to cope and to be able to manage on the one had efficient decision-making, but on the other hand, democratic openness.
    Mr. SHAYS. Is there any question that you wished we had asked that you think should be part of the record? Or you could ask yourself the question and then answer it. That is one question.
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    And the other question is, is there any comment that was made by one of your colleagues to a question that you wished we had asked you?
    Let me just say that you have been excellent witnesses. I appreciate the staff putting together such a very fine panel. Thank you very much.
    And this hearing is adjourned.
    [Whereupon, at 12:42 p.m., the committee was adjourned.]