Financial regulators speaking to GlobalMarkets fear that the US authorities’ climbdown in September on strengthening the Basel bank capital rules is ushering in a new era of international competition in financial regulation, undoing years of cooperation to harmonise rules and create a global level playing field.
Authorities in the US, but also in Europe and elsewhere, should be watchful of this trend, said Michael Hsu, acting Comptroller of the Currency — who heads one of the three US banking agencies, alongside the Federal Reserve and the Federal Deposit Insurance Corp.
“There should be a level playing field, absolutely,” he told GlobalMarkets. But the risk of regulatory competition is now growing, Hsu thinks, because the memories of the 2008 financial crisis are fading — and events around the collapse of Silicon Valley Bank last year have “already been forgotten”.
“We need to be careful,” Hsu said. “Sometimes competition can be used as a euphemism or as a tool to deregulate, and that then is not competition amongst private entities — that’s competition amongst regulatory jurisdictions to loosen regulation.”
US regulators attempted to beef up bank capital requirements last year in the wake of SVB, as part of the finalisation of the Basel III regulations, dubbed the Basel endgame.
Basel III is the version of the Basel Committee on Banking Supervision’s global accords introduced after the 2008 crisis.
But US regulators last year came up against a torrent of industry opposition. Lobbyists embarked on a publicity campaign that targeted people way beyond the banking sector.
In September, Michael Barr, the Fed’s deputy chair for financial supervision, said key parts of the proposed changes — including charges for operational, real estate and markets risk — would be either watered down or removed altogether, and smaller banks also be subject to less stringent requirements.
Although the Fed had previously been accused of gold-plating the Basel requirements, regulators in the European Union and the UK have not seen its change of course as equalising things. They have delayed their own implementation of Basel III so that their banks are not put at a disadvantage to US firms.
Breaking ranks
Mario Centeno, governor of the Bank of Portugal, compared various economic blocs which are implementing Basel to a line of rugby players, which need to advance together.
He told GlobalMarkets: “The worst thing for me will not be that we are not moving fast enough, but if we are dismantling things that we already achieved.”
Global improvement and convergence of banking standards has been the Basel Committee’s goal since it was founded in 1974.
But Fernando Restoy, chair of the Basel Financial Stability Institute at the Bank for International Settlements and a former Bank of Spain deputy governor, told GlobalMarkets that delays were unwelcome — even if the Basel Committee had not seen any fundamental departures from the standards yet.
Basel III had been vital in helping the financial sector cope with shocks such as Covid-19, Restoy said. But he acknowledged that: “The political environment today is not the most comfortable for international standard-setting bodies.”
It is not just regulators that want level standards across countries — some banks want them too. In the context of efforts to harmonise European regulation, Bettina Orlopp, chief executive of Commerzbank, said a single regulatory market for banking services was crucial. Harmonising national deposit protection schemes would create cross-border financing opportunities to “really move liquidity and capital wherever there are growth areas across Europe,” she said. “You can’t do that at the moment.”
With the EU increasingly focused on finding ways to bolster its competitiveness including in financial services, many fear another Donald Trump-led US administration could ditch existing Basel implementation plans entirely and start all over again — which could add another three years on to the process, according to a financial services lawyer in Washington.
Europe would then have to decide how to respond, said Tim Adams, president of the Institute for International Finance.
The most likely scenario is that a Trump administration would simply ignore the issue, according to Adams. He said it would raise questions about the wider Basel process of international regulatory cooperation if the biggest member was “wilfully and decidedly not compliant”.
Adams said the fact that regulators were still putting in place rules to prevent the next 2008 raised the question of whether it was needed at all. “We just had a variety of shocks in which the system performed admirably well,” he said, while arguing SVB was an idiosyncratic case. “I think that the risk of a financial crisis is infinitesimally small. We have plenty of capital and plenty of liquidity.”
In an interview with GlobalMarkets, Tobias Adrian, financial counsellor at the International Monetary Fund, insisted that fully phasing in the minimum Basel III standards remained vital. “When you see some major members of the Basel Committee which have not implemented the framework, you do have concerns that the international standard-setting process might be undermined,” he said. “Undermining this common commitment would risk unravelling bank stability globally.”
Additional reporting by Steve Gilmore