Treasury Deputy Secretary Kimmitt meets with EU

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STATE PASS TO OIRA/OMB
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E.O. 12958: N/A
TAGS: EFIN ECON ETRD EIND EINV EUN

SUBJECT: Treasury Deputy Secretary Kimmitt meets with EU
Commissioner Charlie McCreevy before the TEC.


1. (SBU) Summary: Treasury Deputy Secretary Kimmitt met
with EU Commissioner Charlie McCreevy hours before the
second meeting of the Transatlantic Economic Council
(TEC) meeting on May 1th, 2008. They discussed
transition processes, the TEC, and insurance issues.
They agreed to work on the CommissionQs Solvency 2
proposals and the Deputy Secretary promised to provide
the Commissioner with specific ideas on how to address
U.S. concerns.


2. (SBU) Kimmitt and McCreevy had a warm and open
meeting in McCreevyQs office. The Deputy Secretary was
joined by the Treasury Attach to the European Union,
Barbara C. Matthews, and Treasury Acting DAS, Eric Meyer.
The Commissioner was joined by his chief of staff, Martin
Power, and his deputy chief of staff, Natalie de
Balsadua.


3. (SBU) Commissioner McCreevy opened the meeting by
asking a number of questions concerning the mechanics of
government transition in the U.S. following an election
and change of administration. The Deputy Secretary
described the U.S. transition process, then noted that
the key interlocutors for the U.S. in the Financial
Markets Regulatory Dialogue (FMRD) would remain in place.

TRANSATLANTIC ECONOMIC COUNCIL Q STRATEGIC PLANNING


4. (SBU) Kimmitt turned the conversation to that dayQs
TEC meeting, noting that he was pleased with the progress
the TEC had made so far. He said the TEC had the
prospect of becoming a forum of enduring value to the
bilateral US-EU relationship at the strategic level, much
as the FMRD adds value at the technical level. He noted
the challenge was to link the work of the two groups
without creating a zero sum dynamic. He asked for the
CommissionerQs views on the topic.


5. (SBU) McCreevy agreed, emphasizing that Qwe donQt
want the FMRD to be knocked about by the TEC" and that he
was Qvery anxious to not have our work in the FMRD
derailed by the TEC.Q He agreed the TEC needs and has
momentum, but at present only the FMRD seemed to be
delivering tangible results. Martin Power added that
these pressures could be alleviated as the TEC agenda was
populated by other issues.


6. (SBU) Kimmitt agreed, underscoring his belief that
the TEC was not and should not be a high-level FMRD. To
ensure continuity of the TEC, he believed two components
were needed: 1) Active engagement by legislators,
business leaders, and consumer groups, and 2) clear work
plans identifying short-term, medium-term and long-term
goals. McCreevy agreed.

INSURANCE ISSUES


7. (SBU) Kimmitt then asked McCreevy for his views on
the insurance issues on the TEC agenda. McCreevy began by
expressing strong support for the TreasuryQs proposed
Blueprint for Reform of the U.S. federal financial
regulatory system, and Secretary PaulsonQs speech
releasing the report. He singled out the BlueprintQs
proposals regarding an optional federal charter as a
particularly promising way to address looming insurance
regulatory issues. He noted that the Solvency 2
directive should be finalized early in 2009, but that it
would come into effect in 2011 or 2012. He noted that an
equivalency determination would be required, just as it
was required in the accounting area. However, unlike in
accounting the Commissioner for Internal Markets will not
make the insurance equivalency determination.


8. (SBU) McCreevy indicated that if the reinsurance
collateral issue were not resolved by the time that
Solvency 2 was implemented, then achieving an equivalency
determination for the U.S. would be difficult. He
expressed the opinion that Solvency 2 represented a good
regulatory capital and oversight standard. He added that

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it was possible that the U.S. could address the
collateralization issue and still not achieve an
equivalency determination due to underlying structural
issues in the supervisory system. He indicated that he
continued to hear many complaints about the U.S. system
in Europe, particularly in London. He understood the
difficulty that federal authorities in the U.S. would
have in addressing this issue due to the state-based
approach to regulation. However, goodwill on the part of
the state regulators was insufficient to address the
problem and, in his opinion, the only solution would be
an optional federal charter. He believed that a three-
year window of opportunity exists to address the
formidable political challenges associated with making
this change.


9. (SBU) Kimmitt noted that the Treasury Department has
had a longstanding interest in making progress on
updating the insurance oversight structure in the United
States. He indicated that progress was already being
made. A hearing had been held on Capitol Hill and
legislation had been introduced to provide the Treasury
Department with an insurance oversight office that would
have authority to engage in international discussions
concerning insurance. So engagement exists in
Washington, but not actual momentum yet. He noted that
awareness is growing in Washington that the insurance
oversight structure is out of line with global market
trends and that this adversely impacts the
competitiveness of U.S. markets.


10. (SBU) Kimmitt then expressed concern with the
CommissionQs Solvency 2 proposals. In particular, he was
concerned that adverse impact on U.S. companies doing
business in Europe could reinforce a negative political
backlash in the United States against federalization of
insurance regulation. He expressed the opinion that the
U.S. and the EU needed to intensify their discussions to
look for adjustments over the next 6 to 9 months so that
the Commission could meet its objective without
undercutting the TreasuryQs efforts to obtain an optional
federal charter in the insurance area.


11. (SBU) McCreevy noted that Qwe are well down the road
on Solvency 2. We are trying to have it done by the end
of this year in the European Parliament.Q He indicated
that it would be important to finish the work on this
project before the Parliament started campaigning in
spring 2009 and before the next Commission was in
transition. Martin Power observed that the U.S.
insurance industry had established a transatlantic group
to create a forum to feed into the TEC. He expressed
hope that this forum might be helpful to the broader
effort. McCreevy indicated that it would be helpful to
have a list of significant outstanding issues, noting
that he was not seeking convergence of regulatory
standards with the U.S. but only mutual recognition.


12. (SBU) Kimmitt observed that one group had
recommended a Qgrand bargainQ between reinsurance
collateral (U.S. gives the EU a pass by eliminating the
requirement) and Solvency 2 (EU gives the U.S. a pass
with an equivalence determination). He asked whether the
Commissioner liked the idea. McCreevy answered no.


13. (SBU) Kimmitt noted that state-based insurance
regulation would not be considered equivalent to the
Solvency 2 proposed structure. He offered to prepare a
letter from Treasury to the Commissioner identifying
issues and possible solutions. McCreevy said he would
welcome the suggestions and agreed to work with Treasury
to try to find a solution.


14. (SBU) Looking towards the afternoon TEC discussion
of the issue, Kimmitt and McCreevy agreed to highlight
their mutual efforts to work together to find
constructive solutions. Both agreed that each side
should be sensitive to avoid making it difficult for the
other side to make progress.

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15. (U) Deputy Secretary Kimmitt has cleared this cable.

Murray