WORRYING SIGNS THAT A GREAT GLOBAL DEREGULATION HAS BEGUN / THE FINANCIAL TIMES OP EDITORIAL

Worrying signs that a great global deregulation has begun

Evidence shows the US and Europe are poised to compete to ease the rules

Patrick Jenkins


Valdis Dombrovskis has warned that the UK would only retain full market access to EU clients post-Brexit if UK rules remained 'equivalent' to the rules of the EU27 © AFP via Getty Images


The great global deregulation has begun. The signs are subtle so far, but last week threw up four pieces of evidence that the US and Europe are poised to compete to ease bank regulation — in turn threatening the co-ordinated global approach that has helped make the international banking system safer in the decade since the financial crisis.

Exhibit one: a week ago, Valdis Dombrovskis, the EU’s financial services commissioner, warned that the UK would only retain full market access to EU clients post-Brexit if UK rules remained “equivalent” to — or closely aligned with — the rules of the EU27. Brussels has made a similar point before. This time, though, there was a more explicit deregulatory agenda. Market access, he spelt out, would be dependent on “not starting to engage in some kind of deregulation”.

Deregulation could indeed be in prospect, if Boris Johnson’s Conservatives win a clear majority in this week’s general election. But it is far from a certainty. History, on the contrary, suggests the UK tends to gilt-edged rules from Europe, and has in fact been the architect of much Brussels regulation. Deregulatory initiatives could just as likely originate from the EU.

To wit, exhibit two, which followed on Tuesday when UniCredit, Italy’s biggest bank, announced there would be a significant financial benefit from tweaks made to new capital rules. The Italian bank is the first to quantify the capital relief generated by the EU’s CRD5 bank capital directive relative to the updated “Basel IV” global banking rules, which CRD5 is supposed to implement.

By allowing banks to use forms of debt, not just equity, as part of their capital calculations, the impact of the change is mitigated. Only 56 per cent of the “Pillar 2” capital that is specific to each bank must be funded with equity. This was fixed when CRD5 rules were passed in April. But it had been unclear until now how that would feed through to banks.

In UniCredit’s case, it means an 0.8 percentage point reduction in core equity demands. After the UniCredit disclosure, analysts at Morgan Stanley estimated that European banks should on average gain 0.9 percentage points of equity relief. That offsets the Basel IV increase of 1.1 points — a clear sign that the pendulum on regulatory capital is swinging back. The capital relief is helping UniCredit fund a €2bn share buyback. Analysts predict a string of copycat buybacks across the European banking sector.

Exhibit three: Randy Quarles, the Fed governor in charge of financial regulation, and the head of the global regulatory oversight body, the Financial Stability Board, told a Congressional hearing on Wednesday that overall capital levels at US banks should not rise, despite the extra demands of Basel IV. “We don’t believe that the aggregate level of loss absorbency needs to be increased,” he said in comments that suggested ways will be found to offset increased headline capital demands.

Exhibit four is a small but important initiative being pushed by banks such as Deutsche Bank and HSBC (with a sympathetic hearing from some European regulators), to grant environmentally friendly investments a lighter capital treatment. Addressing climate change is a crucial topic but incentivising green finance in this way looks like a recipe for distorted risk-taking.

Taken in isolation, all of the above might simply suggest pragmatism. Banks are far safer than they were in 2008. Capital levels have increased as much as tenfold over the past decade.

But there are clear signs that Brussels and Washington are eyeing each other with suspicion, spurring fears at the Basel Committee on Banking Supervision, authors of the Basel capital rules, that the globally harmonised approach to regulation could break down.

Competitive pressures to deregulate could not come at a worse time. Geopolitical uncertainties — from Brexit to Hong Kong — threaten economic stability. President Trump’s bellicose trade policies and a domestic Chinese slowdown are hurting global growth. And in financial markets, asset bubbles remain ripe for puncture, as quantitative easing and ultra-low interest rates have inflated the value of everything from house prices to private equity targets.

If at this juncture we fail to preserve a robust and harmonised global approach to banking regulation, history is likely to judge us harshly.