Wall Street to Biden bank cops: We’d like European regulation instead
The dispute underscores the economic and political tensions that have long strained global agreements designed to prevent another banking meltdown.
Corporate America often bristles at Europe’s aggressive regulation of big business. But when it comes to banking rules, Wall Street wants Washington to import the softer approach that’s taking shape in Brussels.
The European Union is flipping the script as it finalizes regulations designed to keep banks afloat during economic storms. The safeguards against future bank bailouts set capital levels that lenders must have to help offset potentially catastrophic losses.
The EU and U.S. are moving in parallel to implement their own versions of the rules, which are the product of international standards negotiated by banking regulators around the world after the 2008 financial crisis.
Despite global agreement on the high-level details, a transatlantic rift is emerging as the EU and U.S. roll out the rules at home. In Brussels, countries including France and Germany won various carve-outs as they tried to shield their banks from regulatory costs, despite warnings from financial regulators. In Washington, appointees of President Joe Biden have proposed more stringent rules that would force large banks to raise their capital levels by up to 19 percent, including tougher curbs on risky lending to home buyers and businesses.
“The tables have turned,” said Thierry Philipponnat, chief economist at the European consumer group Finance Watch.
It’s triggering an outcry from U.S. banking and business groups, along with their Capitol Hill allies. They’re beginning to cite the disparity — as well as threats about the potential impact on lending — to make the case that the Federal Reserve and FDIC should pare back their plans. The episode underscores the economic and political tensions that have long strained international agreements designed to prevent another global banking meltdown.
“If the EU is permitting any sort of special treatment for itself, and they’ve agreed to these standards, why wouldn’t the U.S. provide that special treatment for itself as well?” said Bill Hulse, senior vice president at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness.
The lobbying battle marks the last phase of an effort by regulators around the world to protect their economies and taxpayers from banking instability that helped fuel the Great Recession.
Global regulators spent more than a decade hashing out the standards via the Basel Committee for Banking Supervision. Now it’s up to individual countries to enforce the requirements, known as the Basel “endgame” capital rules. The standards are an attempt to establish minimum capital buffers based on the riskiness of various kinds of bank activities.
Europe’s banks have complained for years that the global standards would hit them harder than their U.S. peers by increasing their capital requirements, which could have a knock-on impact on lending. The EU’s banking regulator estimated that the bloc’s banks on average would face a 15 percent hike in capital if the Basel agreement was implemented in full.
The European economy depends more on banks for financing than does the U.S. economy, which has a sprawling financial market where businesses and individuals have more options to tap funds outside of bank loans.
But European banks have struggled to compete with U.S. lenders. “The revenue growth, profitability and valuations of European banks have been trailing behind their U.S. peers since the [financial crisis],” an industry report said in January.
As a result, EU politicians have agreed to numerous carveouts from the Basel agreement to protect the industry, taking a lighter touch to products including low-risk mortgages and loans to companies without a credit rating, to limit the capital blow.
The European Central Bank, tasked with policing banking industry risk-taking, has warned that the deviations will halve bank capital requirements compared with what they would have been under the full standards and could even lead to lower capital levels for some lenders.
ECB officials fear the approach will weaken the ability of the EU’s banking industry to weather shocks in the future.
“Watering down the safeguards provided by agreed global standards now would send a detrimental message not only on the future resilience of EU banks, but also regarding the EU’s commitment to international agreements,” European Central Bank vice president Luis de Guindos said in June.
In the U.S., regulators are facing the opposite complaint from industry — that they’re planning to impose capital requirements beyond the Basel accord.
U.S. agencies plan to curb the extent to which large banks can use internal models to gauge the riskiness of their own lending — a practice that the EU is retaining under the Basel agreement. Capital requirements tied to mortgage lending and historical losses would also be higher than the Basel mandate.
Now, big U.S. banks and their trade groups are ramping up efforts to convince regulators to scale back the proposed hike in capital requirements. Part of their strategy will be to point to the disparities in the U.S. and EU rules.
Kevin Fromer, who represents eight of the largest U.S. banks as the head of the Financial Services Forum, said “competitive inequities” between the two sets of rules would affect customers.
He said the Basel process has “perversely” not resulted in common standards, with Europeans tending to deviate in ways that reduce capital requirements and the U.S. veering to increase capital requirements.
“The EU is applying the requirements that it thinks are beneficial to its economy and its banks,” Fromer said.
On Capitol Hill, bank lobbyists are circulating charts showing how the U.S. approach is more stringent than the EU and other countries. They warn that the costs of complying with the capital rules could force large banks to pull back lending and other services.
“The U.S. is in a pretty radical departure from the whole Basel approach and its implementation in other countries,” said Bank Policy Institute President and CEO Greg Baer. “It’s happening because an adoption of the Basel proposal in adherence to its principles would result in lower capital requirements.”
Republican lawmakers are beginning to speak out.
Rep. Andy Barr (R-Ky.) said in a statement that the U.S. plan “goes well beyond the EU’s proposal” and “puts large, U.S.-based international financial institutions at a disadvantage to their foreign counterparts on the global stage.”
But critics making the case for a level playing field with the EU will find it hard to argue that the disparity is a huge competitive threat.
Former FDIC Chair Sheila Bair said there were a number of European banks that were powerhouses prior to the great financial crisis but that “a lot of that competition is gone.” She said warnings about international competitiveness and lending impacts are “standard talking points.”
“Stronger guardrails in the United States have allowed the largest U.S. banks to outcompete and outpace the growth of their foreign counterparts since the 2008 financial crisis,” Senate Banking Chair Sherrod Brown (D-Ohio) said in a statement. “A safe U.S. banking system goes hand-in-hand with a competitive one.”
It’s unclear whether it will move the needle with decision-makers at the Fed, FDIC and Office of the Comptroller of the Currency. The three agencies declined to comment.
Alexa Philo, senior policy analyst at Americans for Financial Reform, a coalition of labor and consumer groups, said U.S. officials “need to do what makes the financial system more resilient, and not simply respond to what Europe does."
In Brussels, it’s giving critics of the watered-down EU approach a new opportunity to push back. Philipponnat, with Finance Watch, said the EU’s carveouts were already problematic for financial stability reasons, and now they’re even less justified in light of how the U.S. is proceeding.
“We always hear the same thing from both lobbies,” he said. “Looking to the other side of the Atlantic and saying it’s better.”
Jasper Goodman contributed to this report.