US banking review raises fears for standards talks
Fallout from Trump’s move expected • Completion of Basel III seen as litmus test for global rules
LONDON (Reuters) – President Donald Trump’s review of postcrisis banking rules could sound the death knell for new global standards now being finalized and rip apart a common approach to regulating international lenders, according to bankers and regulators.
Central banks and watchdogs around the world have spent the past eight years drawing up regulation aimed at preventing a repeat of the 2007-09 financial crisis. But there are fears that project could unravel after Trump said 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 were trying to complete the final piece of global capital requirements, known as Basel III.
Given that the United States wants to shrink the banking rule book, there are doubts over whether the Basel rules can make it over the finishing line next month if they don’t have backing from the US.
Without support from the world’s biggest capital market, other countries would be less willing to commit.
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 into how banks calculate the amount of capital they hold against risky assets such as loans.
J.P. Morgan chief executive Jamie Dimon said in the aftermath of the financial crisis that European rivals had been “a lot more aggressive” than American banks in calculating capital, meaning they were holding less.
European policy makers have rejected that criticism. But their region’s banks have been lobbying against the remaining Basel rules, saying they would force them to increase significantly the amount of capital they need to hold.
If the US fails to approve the completion of Basel III, the perceived problem that European banks get away with holding less capital than US lenders may not be properly tackled, a source involved in the negotiations said.
“It’s in the interests of American banks to get this done,” the source said.
Others are less optimistic that a deal can now be done after Trump’s intervention.
“It’s going to delay completing Basel III and perhaps lead to it not being concluded,” an adviser to banks said.
“I do fear that Basel IV is doomed,” a banking-industry official added.
There are headwinds from elsewhere, too.
Patrick McHenry, the Republican vice chairman of the House Financial Services Committee, fired a warning shot at Federal Reserve Chairwoman Janet Yellen about the Basel talks in a letter dated January 31, ahead of Trump’s executive order.
The Fed must “cease” all attempts to negotiate binding standards “burdening American business” until the Trump administration has had the opportunity to nominate officials that prioritize “America’s best interests,” McHenry said.
While lawmakers often call on regulators to ease pressure on firms, regulators said Trump’s intervention in banking rules gives more clout to McHenry’s warning. The Basel Committee declined to comment.
GLOBAL COOPERATION
Trump’s decision to review existing, postcrisis banking rules has rung alarm bells among regulators outside the country.
Mario Draghi, the president of the European Central Bank, which regulates the euro zone’s main lenders, said on Monday that easing banking rules could threaten financial stability.
Draghi was chairman of the Group of 20 (G-20) large economies’ 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 because it would no longer be shaping rules that impinge 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 the 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 regulatory matters.
Wright was referring to what was seen in the run-up to the financial crisis, when countries such as Britain resorted to a “light touch” approach to banks to make London a more attractive financial center.
Valdis Dombrovskis, the EU’s financial-services chief, last week said international regulatory cooperation had been vital in tackling the financial crisis and must 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, last week told the BBC he does not expect Congress to approve the wholesale rolling back of rules, but the Trump administration could pressure US regulators to ease up on applying existing requirements.
Anil Kashyap, a Bank of England policy maker, last month said Trump’s nomination for the powerful role of Fed vice chair in charge of banking supervision would shape the US approach to international rule making.
It will have a “huge impact,” a regulatory source added.
The fear among global regulators is that multilateral bodies such as the Basel Committee and the Financial Stability Board could be abandoned by the US under Trump.
Jose Ignacio Goirigolzarri, the chairman of Spain’s Bankia, last week told Spanish television he would be concerned if Trump was questioning 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 homogenization of regulation among developed countries,” he said.
‘It’s going to delay completing Basel III and perhaps lead to it not being concluded’