US regulators responsible for Basel II publicly disagree as to implementation plans. Sarbanes-Oxley (SOX) is attacked by all sides. Foreign companies are rejecting the US as a source of funding. Class actions lawsuits continue to increase year on year. Will the USA cease to offer global firms the competitive and liquid venue they need for raising and managing their capital?
Last month at a hearing of the US Senate Financial Services Committee on Basel II, the FDIC, supported by the OTS, two of the US's four regulators, proposed that a "fail safe" option regarding regulatory capital be implemented. This, a so-called leverage ratio, where capital would be measured as a fixed percentage, in this case 3% of revenues, would be levied wherever the flexible Basel II-calculated capital gave a result less that 80% of current Basel I levels. This suggestion has not only angered both European and American bank chiefs, but has been opposed by the other two US regulators, the OCC and the Federal Reserve.
There is criticism from all sides, politicians, financial institutions, small businesses and exchanges, that SOX is reducing entrepreneurial levels, placing excessive costs of business, and causing foreign public offering prospects to choose London or Hong Kong as floatation venue of choice. Earlier this month, control of the US Senate and House of Representatives passed from the Republicans, traditionally the defenders of big business, to the Democrats, expected to be in favour of small investors. Changes are expected but this is hardly likely to result in an early repeal or dilution of SOX.
Last week, John Thain, the head of the New York Stock Exchange accused the US of imposing cumbersome regulations, reducing competitiveness and stifling the US’s ability to compete for global capital. SOX, and its expensive Section 404 audit and control requirements, was one of four issues identified by Thain - the others being the increasing risk to business of US-inspired class actions, the unwieldy overlap between the numerous US regulators and the isolationism of US accounting standards compared to European and global standards.
Thain said that the US was "not at a crisis point yet", but is this true. Even if the US undergoes a wholesale reform of SOX and its regulatory environment, will that slow and then reverse the flight of capital from the US? Will history reverse itself - or is the US just that as the world's premier financial centre, history?
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