Patience with global bank regulation wears thin

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Tempers are fraying as EU regulators push back on Basel IV and threaten retaliatory ringfencing in Europe.

Given that his bank faces a potential US Department of Justice fine of $14 billion, it is hardly surprising that Deutsche Bank’s John Cryan should be unusually blunt when addressing the topic of US versus European bank regulation.

“The regulations we are facing for the banking sector globally are only for the benefit of the US,” he told a banking conference in Frankfurt in November. “I think it’s about time that Europe started introducing rules that benefited Europe and didn’t play to some policy of global harmonization that sounds good on paper but is not relevant to anything.” 

Someone in Brussels clearly heard him. Just five days later the EU proposed a requirement for foreign banks to capitalize their European operations separately. This will mean that non-EU banks operating within the EU must ringfence bank capital there in a move that directly mirrors the intermediate holding company (IHC) requirement for non-US banks that Washington imposed in 2014.

Unbridled protectionism

When the US introduced IHC rules, the EU railed against such unbridled protectionism. Given the extent to which the US banks have eaten away at European banks’ market share it seemed inevitable that there would be some attempt to level the playing field. Forcing US banks to trap capital and liquidity in Europe will go some way towards this. 

It has the added bonus of punishing the UK post-Brexit as not only will the latter’s banks have to operate separate ringfenced subsidiaries within the EU, but global firms will potentially have to trap two separate pools of capital in the region: one in the EU and one in the UK.

This proposal coincides with signs of a clear pushback against some of the Basel Committee’s final revisions to the Basel III framework (Basel IV). In November, Bundesbank board member Andreas Dombret stated his clear opposition to the risk weight output floors envisaged as part of this, saying that banks can use other instruments such as the leverage ratio to fight risks of modelling and misuse, and declaring: “This is something we’re not prepared to accept.”

European Commissioner for finance Valdis Dombrovskis has said that the Basel Committee would do well to “find a solution which would not unduly weigh on the financing of the broader economy in Europe” and “put our banks at a disadvantage compared to our global competitors”. 

After years of complex and painstaking negotiation, it seems that Basel III is being finalized just as regulators on both sides of the Atlantic have given up on the goal of global harmonization.