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Experts Say: 2017-03-08
Prospects for banking regulation are rather vague
The Basel process is in jeopardy, and the prospects for banking regulation are rather vague, as stated by the head of RBS (Royal Bank of Scotland) Howard Davis.
"As US President Trump struggles to staff his administration with sympathizers who will help transpose tweets into policy, the exodus of Obama appointees from the federal government and other agencies continues. For the financial world, one of the most significant departures was that of Daniel Tarullo, the Federal Reserve governor who has led its work on financial regulation for the last seven years. It would be a stretch to say that Tarullo has been universally popular in the banking community. He led the charge in arguing for much higher capital ratios, in the United States and elsewhere. He was a tough negotiator, with a well-tuned instinct for spotting special pleading by financial firms. But crocodile tears will be shed in Europe to mark his resignation. European banks, and even their regulators, were concerned by his enthusiastic advocacy of even tougher standards in Basel 3.5 (or Basel 4, as bankers like to call it), which would, if implemented in the form favored by the US, require further substantial capital increases for Europe's banks in particular. In his absence, these proposals' fate is uncertain," notes Howard Davies.
"But Tarullo has also been an enthusiastic promoter of international regulatory cooperation, with the frequent flyer miles to prove it. For some years, he has chaired the Financial Stability Board's little-known but important Standing Committee on Supervisory and Regulatory Cooperation. His commitment to working with colleagues in international bodies like the FSB and the Basel Committee on Banking Supervision, to reach global regulatory agreements enabling banks to compete on a level playing field, has never been in doubt," continues the chairman of the Scottish regulator.
"Already, some of those who criticized him most vocally in the past are anxious about his departure. Who will succeed him? The 2010 Dodd-Frank Act created a vice-chair position on the Federal Reserve Board – which has never been filled – to lead the Fed's work on regulation. Will that appointee, whom Trump now needs to select, be as committed as Tarullo to an international approach? Or will his principal task be to build a regulatory wall, protecting US banks from global rules?" wonders the expert.
"We do not yet know the answers to these questions, but Fed watchers were alarmed by a January 31 letter to Fed Chair Janet Yellen from Representative Patrick McHenry, the vice chairman of the House Committee on Financial Services. McHenry did not pull his punches. “Despite the clear message delivered by President Donald Trump in prioritizing America's interest in international negotiations,” McHenry wrote, “it appears that the Federal Reserve continues negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands without transparency, accountability, or the authority to do so. This is unacceptable." In her reply of February10, Yellen firmly rebutted McHenry's arguments. She pointed out that the Fed does indeed have the authority it needs, that the Basel agreements are not binding, and that, in any event, “strong regulatory standards enhance the stability of the US financial system” and promote the competitiveness of financial firms," says Howard Davies.
"But that will not be the end of the story. The battle lines are now drawn, and McHenry's letter shows the arguments that will be deployed in Congress by some Republicans close to the president. There has always been a strand of thinking in Washington that dislikes foreign entanglements, in this and other areas. While Yellen's arguments are correct, the Fed's entitlement to participate in international negotiations does not oblige it to do so, and a new appointee might argue that it should not. Such a reversal would generate tensions within the Fed, and where it would leave the FSB, or indeed the Basel Committee, is unclear. In the early days of the Bank for International Settlements (where the Basel Committee's secretariat is located) in the 1930s, the US government declined to take a board seat, and the US was represented by JP Morgan. It is a little hard to see that arrangement working well today," continues the head of RBS.
"These questions are of more than passing interest in Europe. European capital adequacy directives typically transpose Basel Accords into EU law. If the Basel process stalls, transatlantic deals, which are the crucial underpinning of Western capital markets, will be far harder to reach. There is a further complication arising from Brexit. Absent any special deal between the EU27 and the United Kingdom, British and EU regulators will come together in Basel, not in the European Banking Authority. If Basel becomes a talking shop, without the ability to set firm standards, another key link in the chain will be broken, and it will be harder for the UK to argue that if London's banks meet international standards, they should be granted equal treatment in the EU," notes the banker.
"As central bankers bid farewell to the devil they know, financial regulation has entered a period of high uncertainty – and high anxiety for policymakers as they await an announcement from Mar-a-Lago. No likely Federal Reserve Board candidates have been spotted at poolside, or being interviewed on the golf course, but a decision cannot be far off. Nothing can be taken for granted. The financial world is holding its collective breath," sums up Howard Davies.
Dallas Federal Reserve Bank President
Trader and NASDAQ listing manager
Professor of Economics at New York University
Former director of Office of Management and Budget under President Reagan
Professor of International Political Economy at Harvard University
The senior foreign-exchange and interest-rate strategist
Chief investment strategist at Clarity Financial
Trader, founder of Muddy Waters Research
Financial analyst and economist
Chief economic adviser at Allianz SE
Governing council member of the European Central Bank
Executive Director of UBS AG Wealth Management
Head of the European Commission
Premier of the State Council of the People's Republic of China
Germany’s Federal Minister of Finance
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Former editor-in-chief of The Economist
Head of the Central Bank of China
Chancellor of Austria
Ex-Director of the Budget Office under the President of the United States
Investor, billionaire, the head of Janus Capital Group
Professor at NYU’s Stern School of Business
A former adviser to the president of the Dallas Fed
The Senior Research Scientist of the Institute of Europe RAS
Director of the Institute for Advanced Study in Warsaw
Billionaire, head of the Mexican Civilian Silver Association