June 25, 2010 / 4:28 PM / 9 years ago

Analysis: Financial reform to give Obama limited lift at G20

WASHINGTON (Reuters) - The win President Barack Obama racked up on U.S. financial regulation reform Friday will give him a boost at this weekend’s Group of 20 summit in Toronto but probably only a limited one.

Senate Banking Committee Ranking Member Richard Shelby (R-AL) (L), Chairman Christopher Dodd (D-CT) (2nd R) and Senator Jack Reed (D-RI) (R) wait for the end of a recess from a committee conference on Wall Street reform to hammer out sweeping changes in financial regulation legislation on Capitol Hill, in Washington June 24, 2010. REUTERS/Jonathan Ernst

In the shadow of the 2007-2009 financial crisis, the United States has often found its regulatory structure the target of fingerpointing by other G20 countries at recent summits.

The package agreed to by a joint House of Representatives and Senate negotiating panel would put new curbs on trading by banks, tighten bank capital rules and toughen regulation of derivatives.

When leaders of the world’s biggest economies get together Saturday and Sunday, U.S. officials hope to show they are leading by example when it comes to cracking down on the risk-taking that helped set the stage for the crisis.

But Obama’s effort to showcase U.S. progress on the issue may get overshadowed to some degree by a debate over economic stimulus and deficit reduction that is set to take center stage at the summit.

Analysts say that while the U.S. financial reform bill’s passage is a clear step forward, it is another example of how individual countries are going their own way on financial reform. Without greater coordination, there remains the risk of a “race to the bottom” in which financial players seek out the countries with the most lax regulations.

“As far as the Europeans go, they are going to say, well how does this improve our situation? And how does this immunize us against the kind of risks that we’re collectively associated with?” said David Rothkopf, who is head of Garten Rothkopf, an international advisory firm.

“The U.S. financial regulatory reform does not address the core underlying issues associated with the interconnectivity of markets, with the global derivatives market or even with macroeconomic issues,” said Rothkopf, a former official in President Bill Clinton’s administration.

At the G20, European leaders want to push proposals for global taxes on banks and financial transactions but those have run into opposition from countries like Canada that say their own banks are in good health.


Eswar Prasad, an expert on international economics at Cornell University, said the financial reform package would strengthen Obama’s hand at the G20 by demonstrating a U.S. commitment to tougher oversight.

“Many of the other G20 countries, particularly those in Europe and also the emerging market had viewed the U.S. as foot dragging a little in terms of bringing its financial markets under control,” Prasad said. “This will definitely send a very positive signal.”

But Prasad said the lack of regulatory coordination was a big problem given the global nature of markets.

“If you look at it from a top-down G20 level, then these things are getting fragmented across countries with the particular type of regulation being very country specific,” Prasad said, although he added that some of that was unavoidable.

The passage of financial reform also gives Obama and his Democratic party a major domestic win they can tout alongside healthcare reform in the campaign for the November congressional elections. The bank crackdown is likely to win final approval in the House and Senate in the coming days and be signed into law by Obama by July 4.

Polls show many U.S. voters are furious with Wall Street firms over their role in the financial crisis that plunged the country into a deep recession. Democrats will seek to tap into that anger as they promote the reform legislation over the coming months.

But Julian Zelizer, a professor of public affairs at Princeton University, said the bill might not have a huge effect on voter sentiment.

“It’s kind of now a classic Obama legislation, meaning that it doesn’t make the left happy, it doesn’t please conservatives and it leaves independents not particularly excited,” Zelizer said, noting that some liberals view the bill as watered-down while some conservatives view it as too heavy-handed.

“It’s kind of piecing together different demands without satisfying any particular constituency,” he said.

Writing by Caren Bohan, Editing by Jackie Frank

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