By Brooke Masters and Joanna Chung in New York
Published: August 4 2009 19:26 | Last updated: August 4 2009 23:26
International financial services groups should be ex*cluded from the US market if they are based in countries that are havens from regulation, according to the head of a US congressional committee.
Barney Frank, chairman of the House financial services committee, said he was concerned the new US push to regulate banks and brokers more rigorously could put it at a competitive disadvantage if other countries did not follow suit.
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As a result, he would like to ban US banks from doing business with countries not subject to similarly tough standards on everything from leverage limits and capital requirements to rules on transparency and clearing of derivatives.
“Once we have rules  . . . we will say to anybody who wants to be an outlier, ‘you forfeit your right to participate in the American system’,” Mr Frank told the Financial Times. “We will instruct the [Securities and Exchange Commission] and Treasury and the Fed to deny access to the American financial system to any country that holds itself out as a haven to escape our financial regulation.”
Mr Frank says he envisages an exclusion programme that would work similarly to the sanctions the Bush administration imposed on Iranian banks in 2006 as part of efforts to deter that nation from developing nuclear weapons. The main Iranian banks are prohibited from directly accessing the US financial system.
Analysts say that programme has made business more difficult for Iranian banks, although they are able to route transactions through intermediaries.
While Mr Frank is a powerful committee chairman, he would have to win over the rest of Congress and the administration to get his idea made into law. He is also certain to face strong opposition both inside and outside the US.
“It is absolutely the wrong approach,” said a top industry lawyer, who did not want to be identified criticising Mr Frank. “The assumption is that everybody has to do business in the US and we can set global standards. That is absolute nonsense. There are alternatives, including Hong Kong,” the lawyer added.
Harvey Pitt, a former SEC chairman, said the solution to eliminating regulatory arbitrage was to “assist those countries that have robust regulatory regimes, and confer benefits on those under foreign jurisdictions who meet comparably high standards as those prevailing in the US”.
“Given the difficulties with our own regulatory regime, it is not necessarily the view of the rest of the world that US standards are, in fact, the best in every category.”
Tim Ryan, president of the Securities Industry and Financial Markets Association, said that US regulations should not be imposed on other countries.
“Because some regulatory differences among nations are inevitable, policymakers must ensure those differences minimise opportunities for regulatory arbitrage and do not erode the integrity of financial markets.”
The idea of excluding lightly regulated financial groups is not new. Since 1991, the Fed has been able to exclude overseas banks if their home country regulators do not hold them to similar standards to those for US banks. US regulators can also keep out banks and brokers that fail to comply with international money-laundering standards.
“It’s already in place to some extent. It’s not clear whether Frank is just talking about tightening it or something new,” says Doug Landy, banking law partner at Allen & Overy.
The European Commission has an exclusion provision in its proposed directive on alternative investment managers. Outside managers and funds would be excluded if their home states did not offer comparable levels of regulation and tax co-operation. That proposal is seen as a protectionist effort to box out US groups and may be revised.
Mr Frank’s interest in banning groups from non-co-operating countries stems in part from the US experience after it adopted the Sarbanes-Oxley corporate accountability law. Many overseas companies opted to list outside the US rather than comply with Sarbox requirements.
“We are determined to protect our people against any outliers,” Mr Frank said.



FT.com / US & Canada - US threat to banks based in havens