Preparations for G20 Summit Continue in the Shadow of US Elections

The election of Senator Barack Obama as the 44th President of the United States casts a new light on transatlantic and international policy, politics, and commerce. While it is too early to discern the policies he will pursue in many areas of international affairs, it is clear the tone coming from Washington will change.

This change may be felt most immediately in the preparations for the G-20 summit on international financial market regulation called by President Bush for 15 November in Washington. The meeting comes at an awkward moment and President-elect Obama is faced with the difficult decision of whether or how to participate in the event. International leaders who will attend face the equally difficult decision of how to engage with the Obama team while they are in Washington.

Even before the election occurred in the US, EU leadership began intense contacts to hammer out the EU’s negotiating position on the future of international financial architecture. The proposal includes some far-reaching measures for new and further regulation of financial markets that, if enacted, would constitute a break with existing philosophy.

The French EU Presidency on 31 October presented a briefing document that will be the basis for the EU leaders when they meet on 7 November to agree on their common position ahead of the G20 meeting.

The EU has set the bar relatively high in terms of the influence over the direction of new policy that it hopes to exercise at the meeting in the US. The EU Presidency brief states, “The EU should thus define its common position and approach for discussion in the international fora in order to safeguard the leading role it has developed so far. It is important that the inaugural summit delivers a first set of decisions so as to initiate the right momentum around the process and build confidence in it.” However, as noted above, the potential that anything definitive emerges from the meeting is severely limited due to the presidential transition in the US. Expectations of EU leaders need to be calibrated to account for this reality.

It may be possible to emerge from the Washington meeting with some agreement on basic principals. The French paper points in the direction of the following in that regard:

  • Ensure that frameworks are not excessively biased towards the short-term: changing culture in the governance of financial industry towards sustainable value creation is needed.
  • Ensure increased responsibility of all the financial actors, notably along the credit chain and on the role of banks in the securitization process (ensuring risk management and incentives are decisively improved in the originate-to distribute model).
  • Work towards properly enforced and extended transparency on all the segments of financial markets, be it financial institutions, financial products and valuations or jurisdictions.
  • Ensure more consistency across standard setters and across regulatory and oversight frameworks with a common aim to promote financial stability and avoiding regulatory arbitrage.
  • Better anticipate risks and appropriate risk management based on an enhanced cooperation between institutions and bodies detaining financial information.

The paper also includes some more specific proposals. In addition, the German Finance Minister laid out a set of principles on 27 October including concepts on stricter standards on certain investment products, tougher accounting standards for the financial industry, new rules on executive compensation and liability, and limitation on certain trading practices.

The UK, on the other hand, is reportedly still seeking to maintain a more light-touch regulatory regime for the City of London. The UK Finance Minister, Alistair Darling, the Governor of the Bank of England, and the head of the UK Financial Services Authority testified on 4 November before the Parliament Treasury Committee about the financial crisis. In that forum they discussed certain reforms of the industry in terms of capital reserves.

While these issues may come up in Washington, it will be challenging to get to this level of detail and also building a consensus.

As preparations for the summit and the American presidential transition continue, Blank Rome and Interel will continue to track developments and report to our clients, colleagues, and friends.

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