Yesterday, the Senate Committee on Banking, Housing, and Urban Affairs' Subcommittee on Security and International Trade and Finance held a hearing entitled “The International Framework for Modernizing Financial Regulation.” The witnesses testifying at the hearing were:

  • Kathleen L. Casey, Commissioner, U.S. Securities and Exchange Commission
  • Mark Sobel, Acting Assistant Secretary for International Affairs, U.S. Department of the Treasury
  • Daniel Tarullo, Member, Board of Governors of the Federal Reserve System

Subcommittee Chairman Evan Bayh (D-IN) opened the hearing by emphasizing the importance of international cooperation and coordination to achieving financial recovery. He stated that the financial crisis has shown that the global economy is highly interconnected and that policymakers and leaders must work together on all levels to strengthen the financial system. He also noted that world leaders, through a series of high-level meetings and discussions, have already begun implementing a new framework of financial regulation. Chairman Bayh invited the witnesses to provide an update on the status of the progress of international financial regulatory reform following the Pittsburgh G-20 Summit and the role of the Financial Stability Board (FSB), the successor to the Financial Stability Forum and the new policy arm of the G-20.

Assistant Secretary Sobel noted that the Pittsburgh Summit “mark[ed] another milestone in the effort to promote a more integrated approach between national and international regulation and supervision.” During the financial crisis, policymakers and regulators around the world have “redoubled” their efforts to reform and strengthen the current framework. He acknowledged that substantial progress has been made since last year’s G-20 Summit in Washington and noted that the G-20 leaders have now agreed on a concrete timetable to take action in the following four areas: capital reform, aligning compensation with long-term value and risk management, over-the-counter (OTC) derivatives regulation; and cross-border resolution. Assistant Secretary Sobel also noted that the G-20 leaders called on the international accounting bodies to improve present accounting standards. He agreed that the crisis has highlighted the fact that financial duress can transcend borders and has exposed substantial gaps in regulatory oversight that can lead to financial arbitrage. In addition, he recognized the role of the FSB in promoting stability and emphasized that policymakers could be confident that a “machinery for international stability” was firmly in place.

Commissioner Casey agreed with members of the Committee that the financial crisis has indeed identified clear gaps in the regulatory system but she stressed that ultimately legislative action must implement new standards of reform. The Commissioner, who also serves as Chairman of the Technical Committee of the International Organization of Securities Commission (IOSCO), acknowledged that while “IOSCO represents the primary vehicle for development of common international approaches to securities market regulation, the FSB is a key mechanism for the Commission to engage internationally on broader financial market issues.”

Mr. Tarullo noted that in less than a year the United States has participated in three G-20 meetings in which financial stability has been the only or most important subject on the agenda. While the FSB serves as an important forum to coordinate responses to the financial crisis, he cautioned that there is some risk that future progress may be delayed due to negotiations of common standards, particularly with regard to achieving international consensus on cross boarder resolution of troubled financial institutions.

Committee members asked whether efforts to strengthen regulation and supervision in certain financial industries within the United States would be undermined by other countries that choose not to implement similar reforms. Chairman Bayh questioned specifically whether increased regulation of the derivatives markets in the United States would lead to market participants' gravitating to less regulated markets. Assistant Secretary Sobel emphasized that, among the G-20 leaders and the FSB, there was a solid agreement to adopt heightened multilateral standards, although he emphasized that enforcement would occur at the national level. Committee members also asked whether procyclicality of the financial markets was addressed at the recent G-20 summit. Mr. Tarullo noted that, at some level, financial regulation of capital requirements of any sort are procyclical in nature and that presently the Basel Committee and regulators were trying to develop the right calibration.

Senator Richard Shelby (R-AL), noting that the SEC issued last year a roadmap regarding the adoption of International Financial Reporting Standards (IFRS) by U.S. issuers, asked Commissioner Casey whether there was any concern that the independence and objectivity of the International Accounting Standards Board (IASB) would be compromised given the tremendous impact of accounting standards on the financial system. Commissioner Casey acknowledged the efforts and recent work of both the IASB and the Financial Accounting Standards Board (FASB) and asserted that, despite political pressures, both bodies were committed to reconciling and converging present accounting standards. She also emphasized that the SEC remains committed to supporting the efforts of both standard setters and noted that, in coming months, the SEC would release further guidance as to the next steps regarding the adoption of IFRS by U.S. issuers. Commissioner Casey also supported the SEC’s recent adoption of new and proposed rule makings regarding credit rating agencies, including the elimination of references to credit ratings in certain SEC rules. Committee members expressed concerns that similar actions to limit and regulate the role of credit rating agencies may not be adopted by regulators in other counties. Commissioner Casey, however, noted that many jurisdictions have highlighted the importance of credit rating agency reform.

Before the conclusion of the hearing Chairman Bayh asked the panelists to provide their thoughts on the role of the IMF, particularly in light of the enhanced role of the FSB. Assistant Secretary Sobel stated that the IMF already plays a very important role in promoting financial stability, as reaffirmed at the Pittsburgh Summit. He noted, however, that the IMF could continue to play an important role in several additional areas, including providing early warnings of systemic risk and high level reports like the most recent semi-annual Global Financial Stability Report that was issued earlier that day.