The European Union’s plan to grant banks concessions from global standards may encourage President-elect Donald Trump to follow through on his pledge to roll back regulations in the U.S.
The EU’s executive arm blunted a number of international rules on capital, leverage and liquidity in draft legislation introduced last week, arguing that the alterations were needed to promote growth and jobs. Trump’s advisers are using the same logic to justify a plan to scrap the Dodd-Frank Act, the centerpiece of the U.S. response to the financial crisis.
One such EU change with the potential to spur a U.S. policy shift is a cut in the amount of capital banks need for derivatives they handle for clients that are settled at third-party clearinghouses. The EU has taken the lead in softening the rule, potentially saving its banks billions of dollars and putting pressure on the U.S. and the Basel Committee on Banking Supervision to follow suit or risk fracturing the global financial framework.
“Our markets are global, and it’s critical that the Basel Committee and other international and national regulators take similar action,” said Walt Lukken, president of FIA, a trade group that represents banks, brokers and high-speed traders active in derivatives markets around the world.
After years of ratcheting up regulatory requirements for banks, the EU’s sweeping legislative proposals underscore policy makers’ increased willingness to respond to industry concerns that post-crisis rules have overreached and threaten to harm the economy. This argument is especially potent in Europe, where companies rely on banks for most of their financing.
When asked last week about Trump’s potential to disrupt the global banking framework, Valdis Dombrovskis, the EU’s financial-services chief, said Europe is implementing the rules and expects other countries, including the U.S., to do the same. Andreas Dombret, a member of the Bundesbank Executive Board, echoed those sentiments on Monday.
“I very much hope that the new U.S. administration will continue the trust-based cooperation in the Basel Committee,” Dombret said in an opinion piece published in French business daily Les Echos.
Countries don’t have to translate international rules word-for-word into national law, however. The EU took the opportunity to tailor the rules to the “specificities of the European banking sector,” as Dombrovskis put it.
Anthony Scaramucci, founder of SkyBridge Capital and a Trump adviser, made a similar case last week for easing U.S. regulation to boost the economy.
“We’re over-regulating the society to try to prevent a systemic crisis,” Scaramucci said. “When you over-regulate a society, what you do is you slow down the growth and you slow down the opportunity.”
The EU’s proposal on derivatives deviates from a Basel Committee standard on bank leverage that forces derivatives dealers to include collateral they receive from clients when adding up their total exposure to assets, meaning banks must have more capital to handle the trades.
The FIA, along with executives from the world’s biggest clearinghouses, including those owned by CME Group Inc. and London Stock Exchange Group Plc., have lobbied for years that the rule punishes banks for accepting collateral from clients for futures and other derivatives. The FIA represents banks such as Goldman Sachs Group Inc., Barclays Plc and Credit Suisse Group AG.
While the Basel Committee and U.S. regulators have been weighing a change, neither has so far moved forward. The Bank of England and the U.S. Commodity Futures Trading Commission Chairman Timothy Massad have publicly called for regulators to alter the Basel Committee standard, while Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has opposed such a move.
The EU also wants to ease international standards mandating that lenders have stable funding to weather future downturns. Its proposal puts the standard in place, but seeks to avoid harming derivatives and short-term funding markets that the industry has said could otherwise see costs spiral.
The European Commission, the EU’s executive arm, said its proposal was designed “not to hinder the good functioning of EU financial markets and the provision of risk-hedging tools to credit institutions and end-users.”
As written by the Basel Committee, the stable-funding rule for derivatives would lead to an additional annual cost of as much as 15 billion euros and would damage the ability of banks to trade with clients, according to industry groups.
When the U.S. Federal Reserve proposed its version of the stable-funding rule, it asked for industry feedback about whether to make similar changes to how much money banks need for derivatives. The Fed hasn’t completed the rule yet.
The EU also decided to phase in Basel standards on market risk over three years, which drew praise from the industry. The U.S. is yet to adopt the rules.
“Following Europe’s proposals, we would encourage other regulators to adopt similar phase-in approaches in order to achieve global consensus on timing,” says Mark Gheerbrant, head of risk and capital at the International Swaps and Derivatives Association.
— Related on ThinkAdvisor:
- Trump Victory Changes Financial Services Leaders, Priorities
- SEC’s White Warns: ‘Serious Mistake’ to Weaken Securities Rules
- Kashkari, Minnesota Fed Chief, Has Plan to End Too-Big-to-Fail Banks
- The ‘Big Trump Rethink’ on Economy: HFE Economists