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Fratto: Financial Regulations in Hand, Now the Real Work Begins


Whew! Now we can all take a breather from all this arcane financial regulation talk.

Not quite.

When in the fall of 2008 the G20 was elevated from a quiet gathering of finance ministers to summit status including heads-of-state, it was believed that the authority of political leaders could quickly achieve what had never been quickly achieved before: global standards for financial institutions and cross-border transactions.

This weekend's G20 meeting in Torontostarts the clock on that effort now that President Obama will arrive with financial regulatory overhaul legislation in hand with which to bludgeon other nations into common action.

Few following the legislative debate in the US Congress have considered the global nature of our financial system. Congress itself seemed to write the legislation with a quaint, insular outlook with no consideration of the world beyond our shores. They maintained this outlook despite the international aspects of the financial crisis, and with little regard for how their new regulations will impact the competitive environment for US firms.

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The new financial regulationswill cause some upheaval for US firms and markets, and it will certainly dampen the growth outlook for the US economy.

The relatively narrow Sarbanes-Oxley public company accountability law gave rise to troublesome unintended consequences.

This legislation is orders of magnitude more far-reaching than Sarbanes-Oxley. In effect it will be a full-employment bill for K-Street lawyers and lobbyists for years to come. It's not a pretty bill.

But if you understand that the financial system is global — global transactions in the US dollar alone are measured in the trillions of dollars — then you understand that the US legislation is a sideshow, at times, a vaudeville act.

The real work now, the real test for President Obama and Treasury Secretary Geithner, is to quickly bring the rest of the world along on the only reforms that will truly protect the global financial system from crisis in the future: common standards for the appropriate quantity and quality of capital, and acceptable levels of leverage and liquidity.

Believing their institutions were better regulated, and fearing the competitive force of US financial firms, European nations have always balked US efforts to improve the quality and quantity of capital. Their position hasn't seemed to change and the health of European financial firms is being tested by markets.

With US financial regulations now set, there's no time to rest.

President Obama and Secretary Geithner need to make it clear in Toronto that the world must come to agreement this year on common standards. If they fail, the myopic US financial regulations will over time only serve to damage America's standing as the world's preeminent financial center, and the next financial crisis will have found its roots.

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Tony Fratto, a CNBC contributor, is Managing Director of Hamilton Place Strategies – a strategic economic policy and communications firm based in Washington, DC. He is a former White House Deputy Press Secretary for the George W. Bush Administration and Assistant Secretary of the Treasury. You can follow him on Twitter at http://twitter.com/TonyFratto.