Trump move stirs fear of threat to new global standards on banking
London — President Donald Trump’s review of post-crisis banking rules could sound the death knell for new global standards being finalised and rip apart a common approach to regulating international lenders, say bankers and regulators.
Central banks and watchdogs round the world have for eight years been drawing up regulations to avert a repeat of the 2007-09 financial crisis. Now it is feared the project could unravel with Trump saying he wants the US to row back on capital rules.
Trump’s order for a regulatory review to overcome what he sees as obstacles to lending came as banking watchdogs try to complete the final piece of global capital requirements, known as Basel III.
The US wants to shrink the banking rule book and it is doubted that proposed Basel rules can make it over the finishing line next month if not backed by the US. Without support from the world’s biggest capital market, other countries would be less willing to commit too.
The core aim of the outstanding part of Basel III that regulators are working on — dubbed Basel IV by critical banks that worry about more stringent capital requirements — is to impose more consistency in how banks calculate the amount of capital they hold against risky assets such as loans.
JPMorgan CE Jamie Dimon said that after the financial crisis European rivals were "a lot more aggressive" than US banks in calculating capital, meaning they were holding less.
European policymakers disagree with that criticism, but their region’s banks have been lobbying against the remaining Basel rules, saying they would force them to increase significantly how much capital they must hold.
A source close to negotiations said that if the US did not approve completion of Basel III the perceived problem that European banks get away with holding less capital than US lenders may not be properly tackled.
"It’s in the interests of American banks to get this done," the source said.
Others are less optimistic about a deal after Trump’s intervention. "It’s going to delay completing Basel III, and perhaps lead to it not being concluded," said one banking adviser. "I fear that Basel IV is doomed," he said.
There are headwinds from elsewhere too. Patrick McHenry, Republican vice-chairman of the House financial services committee, fired a warning shot at Federal Reserve governor Janet Yellen on the Basel talks in a letter dated January 31, ahead of Trump’s executive order.
The Fed must "cease" attempts to negotiate binding standards "burdening American business" until the Trump administration gets a chance to nominate officials who prioritise "America’s best interests", McHenry said.
While legislators often call on regulators to ease pressure on firms, regulators said Trump’s banking intervention added clout to McHenry’s warning.
The Basel committee declined to comment.
Trump’s decision to review existing, post-crisis banking rules has rung alarm bells among regulators abroad. Mario Draghi, president of the European Central Bank, which regulates the eurozone’s main lenders, said on Monday that easing banking rules could threaten financial stability.
Draghi was chairman of the G20 regulatory task force, the financial stability board, which during the financial crisis was instrumental in building up a global approach to reinforcing banking standards.
A former regulator said the US would be scoring an own goal by withdrawing from multilateral bodies such as Basel as it would no longer be shaping rules that impinged on US banking competitiveness globally.
"It’s early days, but what we have seen in language and rhetoric from Washington is worrying," said David Wright, a former top EU official, who was part of crisis-era efforts to create global regulatory consensus.
"If you break international consensus, you are effectively opening up a regulatory race, and heaven knows where it will end," said Wright, now at Flint Global, which advises companies on regulation.
Wright was referring to what was seen before the financial crisis, when countries such as Britain resorted to a "light touch" approach to banks to make London a more attractive financial centre.
Valdis Dombrovskis, EU financial services chief, said last week that international regulatory co-operation was vital in tackling the financial crisis and had to continue.
Much will hinge on how much regulatory change Trump can actually push through.
Former Democratic congressman Barney Frank, who jointly sponsored the Dodd Frank Act that Trump wants to review, told the BBC last week he did not expect Congress to approve the wholesale rolling back of rules, but the Trump administration could push US regulators to ease up on applying existing requirements.
Anil Kashyap, a Bank of England policy maker, said last month that Trump’s nomination for the powerful role of the Fed vice-chairman in charge of banking supervision would shape the US approach to international rule making.
Global regulators fear that the US under Trump could abandon multilateral bodies such as the Basel committee and the Financial Stability Board.
Jose Ignacio Goirigolzarri, chairman of Spain’s Bankia, told Spanish TV on Tuesday he would be concerned if Trump questioned the usefulness of international banking rules. "It would worry me very much because I think it’s very important, very relevant, that there have been advances in the homogenisation of regulation amongst developed countries," he said.