The election of Donald Trump may allow banks to dodge the full impact of global regulators’ post-2008 crisis crackdown.
The Basel Committee on Banking Supervision is racing to complete a revamp of international capital standards by year-end. The US has pushed for strict rules to protect against future market meltdowns, whereas Europe and Japan want to rein in proposals that could hit banks with billions in costs. Basel Committee members including the US Federal Reserve and the European Central Bank are under enormous industry pressure to soften the rules.
Trump’s ascendancy and his vow to dismantle financial regulations could throw another wrench in the works. If he stalls US implementation of the revised Basel Committee standards on how banks measure asset risk, or ignores them altogether, Europe could follow suit. And if the US and Europe go their own ways, the last piece of the global response to the financial crisis could be undermined.
“I think that before Trump, Basel was going to be softened down significantly,” Sam Theodore, managing director for financial institutions at Scope Ratings, said in an interview. “And now with Trump, I think the whole thing is going to become more of a symbolic exercise.”
The memory of the crisis is fading, and “you have all the ingredients for the anti-regulation backlash to continue,” he said.
Trump’s election comes at a critical juncture in the debate at the Basel Committee, which has heated up this year amid a huge industry lobbying campaign to ease the new standards on how banks assess credit, operational and market risk to determine their capital requirements, a package the bankers call Basel IV.
The Basel Committee is “working intensively” to wrap up the reforms on time, chairman Stefan Ingves said last week.
If the global regulator meets its year-end deadline, Trump won’t have time to affect the US negotiating position by shaking up the country’s four organisations on the Basel Committee, which also include the Federal Deposit Insurance Corp.
“The key thing that worries European banks at the moment is the progress of Basel IV,” Howard Davies, chairman at Royal Bank of Scotland Group, said last week. “An agreement is supposed to be reached by the end of the year. I doubt if the new Trump administration will be able to influence that.”
European Union opposition to key elements of the Basel Committee’s proposals has already turned the talks into a hard slog. EU politicians and policy makers insist not only that the new rules don’t significantly increase overall capital requirements, but also that the bloc’s banks aren’t unduly punished.
The US, by contrast, has consistently advocated tough rules. As recently as last week, FDIC vice-chairman Thomas Hoenig, a political independent, warned against backsliding.
“Momentum is developing within the Basel Committee to undermine measures that could increase bank capital levels, and some jurisdictions are threatening to walk away if the measures are thought too strict,” Hoenig said in remarks prepared for a speech. “The US should avoid joining this race to the bottom.”
The process to put Basel Committee standards into national rules can easily take years to accomplish, however, and this is where Trump and Republicans in the US Congress will have the most sway. Trump will eventually get a chance to install new faces in the Fed, FDIC and the Office of the Comptroller of the Currency, the other US Basel member.
Trump will “influence the process not only through what Treasury says, but also who comes to be head of the OCC and FDIC and vice-chair of supervision at the Fed,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington.
If the Basel Committee fails to deliver the package of new rules on time, US influence on the negotiations could wane, Barclays analysts wrote in a note to clients last week.
“Trump’s election campaign presented a vision for the US that was both less weighed-down by regulation, but also less engaged in shaping global consensus,” they wrote. Should Basel miss its deadline, “US input into Basel IV may reduce once Mr Trump comes to power.”