23 February 2017

Andreas Dombret: The future of global economic cooperation - Brexit, Basel III and beyond

3. Brexit

I'd like to discuss briefly what focused cooperation would mean for Brexit negotiations and the future relationship between the European Union and Britain.

I think it is fair to say that we are searching intently for a workable solution that ensures friendly collaboration. Yet the scope of possible solutions is limited by the British decision for a hard Brexit, as well as by the EU's understandable prerogative to prevent cherry-picking.

One of the possible scenarios we now have to imagine is making cooperation possible in two legally distinct jurisdictions, with different legal frameworks. This would mean that firms would have to comply with partially-differing rules. To continue serving their clients in the other jurisdiction, it might be wise for banks to check if it is viable to open branches or subsidiaries in the respective economic area.

In such a scenario, close coordination between supervisors becomes crucial. When regulations differ, it is our responsibility as supervisors to facilitate cross-border activity without imposing undue operational burdens. The fact that Sam Woods and I are both here tonight may serve as proof that we both take this very seriously.

Let me give you a concrete example: when EU supervisors investigate a bank's internal model to calculate regulatory capital requirements, they could build - for the time being - on the findings of the Prudential Regulatory Authority; likewise, the PRA could build on the verdict of the EU's Single Supervisory Mechanism. For that to be viable, both the PRA and the ECB or the Bundesbank would need detailed information on each other's decisions. We would need a close, responsible cooperation between supervisors.

4. Basel III

Now for something completely different: the finalisation of Basel III - that is the final piece to complete global regulatory reforms after the financial crisis. A globally harmonised standard for all banks would be the welcome result.

Yet one obstacle remains in the way: that of regionally balanced capital requirements. Harmonisation is important, but so is a regionally balanced outcome. However, I am confident that we can find a solution that is acceptable to all Basel Committee members. I just hope that recent opposition to the Basel reforms, voiced by members of the US Congress, are simply political rhetoric, and that the US remains committed to harmonised standards for global banks. Please rest assured that we remain dedicated to making Basel III a success.

5. Racing to the bottom?

But let me make one thing very clear: focused cooperation and more national autonomy must not be abused as a scapegoat for special interest policies. It must not result in a race to the bottom.

I am deeply troubled by recent efforts to water down post-crisis reforms of financial regulation, whether it is the US presidential decree to cut back Dodd-Frank, the UK's "financial centre strategy", or the European Commission's sometimes overzealous approach to reducing burdens on European banks.

Such policies may seem to be in the best national interest, but ultimately they are special interest politics - the very kind of policies which strengthened populists in the first place. We must expose these policies for what they really are: threats to financial stability.

6. Fostering cooperation

A few years down the road, I very much hope that we will be living in a world in which the close friendships between Britain and Germany, between the European Union and Britain and between the United States and Europe still form the bedrock of international cooperation.

In such a world, we would still be close trading partners and our financial centres would retain their close ties - our supervisors would work together to ensure high regulatory standards, without imposing undue burdens on firms.

Let's not be unrealistic: achieving such cooperation is highly challenging. We need to define the areas in which we want to cooperate, and to what degree we want to cooperate - this will be difficult politics. But it is worth trying to save the post-war order - by developing it further.

We can all further that cause: by finding solutions that respect the legitimate interests of countries wanting increased national autonomy and the need to continue global economic cooperation. [...]

Full speech

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