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It is Europe's turn to get its house in order

The US is on the verge of launching the most significant financial reform since the Great Depression. The regulatory overhaul - which US President Barack Obama is expected to sign into law in the next few weeks - will mark his second major legislative achievement since pushing through health care reform. Whatever happens to the rest of his presidency, his congressional accomplishments will have already earned him a significant place in the history book.

As the country with the most important and liquid capital markets in the world, the reform is being closely watched outside the United States. It is Washington's most significant response to the financial crisis since bailing out the major financial institutions. The final shape of the reform remains to be ironed out as lawmakers work to merge the Senate bill, which was passed this month, with the bill approved by the House of Representatives last year. But the general outlines and direction of the reform are already clear. The US reform efforts have left European governments in the dust as they are still recovering from the shock of the eurozone crisis. Paradoxically, it has all along been the Europeans who have been shouting most loudly about the need to toughen financial regulations.

The US reform contains regulatory initiatives which may serve as examples for other jurisdictions aiming to make their financial systems more robust and supervision more vigilant. But there are also some questionable features which may not be so beneficial. One thing for sure is that it will not prevent the next financial crisis. Market instability is inherent in the capitalist system, and its periodic breakdown is almost inevitable. Even after a crisis, people can rarely agree on what really caused it. What most people can agree on is that the next crisis will almost certainly come from an unexpected quarter, as such crises almost always do.

The new legislation will ban deposit-taking banks from proprietary trading and running their own hedge funds; set up a consumer financial protection agency to regulate the sale of credit products such as mortgages and credit cards; and enable government agencies to seize control of any systemically important firm in danger of imminent collapse. The opaque trading of derivatives - a highly lucrative source of income for financial firms as it enables them to monopolise market and pricing information - will be mostly pushed onto central clearing houses, though there are likely to be many exemptions. A key aim of the reform is to restrict the risk-taking behaviour of deposit-taking banks from gambling with other people's money. Regulators are empowered to impose stricter capital, leverage and liquidity standards on systemically important institutions. They will also start paying attention to asset prices to anticipate bubbles, a radical departure from the Federal Reserve philosophy of Alan Greenspan and Ben Bernanke, according to whom bubbles cannot be pre-empted.

All of these are sensible moves. But the new law will create new authorities and agencies on top of, and - in some cases - in place of, existing ones. In other words, it has done nothing to simplify the overly complicated regulatory structure, which many critics have argued was a contributing cause of the financial crisis.

Nevertheless, as the country where the financial crisis first started, the US has moved to put its own house in order. Now, it's the turn of the Europeans to follow suit. That is, arguably, an even more urgent task - for the sake of their union's future and of the global economic recovery.

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