Bank rules: back to the Wild West days?
Trump rejects controls brought in to avoid another crisis
WHEN the US banking system sneezes, the world doesn’t simply catch a cold — it gets a near fatal fever. This was evident during the global financial crisis, which was triggered by the collapse of Lehman Brothers.
After the crisis, international banking regulators introduced stringent measures to protect banks and financial systems from stresses and shocks, such as the collapse of a bank and the ripple effects that would have on other banks.
But with the administration of President Donald Trump adopting an antiregulatory stance — which has resulted in the share prices of US banks rallying on the New York Stock Exchange — there is concern about the implications for the global financial system.
Trump is showing no signs of backing down on the promises he made during his campaign, such as his pledge to overhaul the 2010 DoddFrank act which imposed tough restrictions on banks after the Wall Street meltdown.
His administration’s approach is also seen as hostile to the efforts of the Basel Committee on Banking Supervision to implement global standards.
Dodd-Frank introduced extensive and transparent regulation of financial markets. It included measures to protect consumers from risky activities on the part of financial services providers.
Republican politician Patrick McHenry, vice-chairman of the financial services committee in the House of Representatives, expressed disdain last month for the US Federal Reserve’s participation in Basel and other international forums.
McHenry called it “unacceptable” that the Fed was negotiating international regulatory standards “among global bureaucrats in foreign lands without transparency, accountability or the authority to do so”.
A US withdrawal from organisations such as Basel would be potentially devastating for US banks in the long term and would compromise the stability of financial systems across the globe. SIGN OF THE TIMES: The 2008 global financial crisis, and the Lehman Brothers bankruptcy, prompted international efforts to tighten capital requirements for banks
“The withdrawal of the US would take away the credibility of Basel,” said Professor Johan van Rooyen of Stellenbosch University. “That, I think, would create a lot more uncertainty in banking — apart from the US, in Europe as well.”
Mthuli Ncube, professor of public policy at Oxford University’s Blavatnik School of Governance, said the stance of the Trump administration would undermine the ability of central banks to co-ordinate their regulatory efforts, “given the global nature of the top-tier banks”.
He added: “The banks will also be able to conduct ‘regulatory arbitrage’ as they seek to make profits from exploiting the differences in regulatory standards.”
McHenry complained that international regulation “unfairly penalised the American financial system”, but Ncube said it was unclear how being part of a global community of regulators led by the Fed could undermine the competitiveness of US banks.
“There is no evidence in this regard, and on the contrary there is reason to believe the involvement of the Fed globally creates a smoother path for US banks as they conduct their business globally,” he said.
One area of concern is the push to repeal regulations that seek to put clients’ interests first. “Indeed, a repeal of provisions within Dodd-Frank that put clients first could set a precedent for other jurisdictions around the world, including emerging markets, to follow suit,” said Ncube.
While global regulation has helped stabilise the banking system, Basel III recommendations and regulations around capital requirements for “systemically important banks” have had unintended consequences. They were cited, for example, in the decision by Barclays plc to sell off its stake in Barclays Africa.
“Systemically important financial institutions are very unlikely now to own controlling stakes of around 50% in banking operations in emerging markets like Africa,” said Adrian Cloete, a portfolio manager at PSG.
This was unfortunate because emerging market banks could derive significant benefits from having one of these big-hitter financial institutions as a majority shareholder.
Cloete said South African commercial banks were far more conservative when quantifying risk-weighted assets in the capital calculation for Basel III, “so their leverage ratios of around 6.5% are also way above the South African Reserve Bank’s required 4% and the global requirement of 3%”.
Another mark of South African banks’ resilience was their performance during the financial crisis.
“Earnings only declined by between 20% and 30%,” Cloete said. In Europe and the US, financial institutions had suffered complete collapses in earnings and had been forced to raise capital.
Co-Pierre Georg, a senior finance lecturer at the University of Cape Town, said once the dust had settled it was very likely the US would remain a member of organisations like the Basel committee because it had already spent a lot of money to comply with the required standards.
“In fact they have been quite happily driving the agenda when it comes to Basel III because US banks are in much better shape than European banks,” Georg said.
It was the US banks that had pushed for stricter and stronger regulations because they were in a better position to comply with them, he said.
The involvement of the Fed creates a smoother path for US banks
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