14 November 2016

Financial Times: Trump win raises question of Europe’s financial security

During his campaign, the US president-elect made it plain that he believes in unwinding some financial regulation. So far, the little attention paid to this topic has centred on his possible dismantling of the Dodd-Frank legislation that imposed new rules on Wall Street in the aftermath of the 2008 financial crisis.

However, Mr Trump’s agenda of financial deregulation is likely to be as globally relevant as his military views. Just as the outgoing US defence secretary has been an enthusiastic backer of Nato, so Dan Tarullo, the Federal Reserve governor who has had special responsibility for financial regulation, has been a towering presence in global rulemaking ever since he took the job in 2009.

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At the moment, there are two vacancies on the Fed board and the position of vice-chairman for banking supervision is open. So Mr Trump could easily select a new governor and displace Mr Tarullo as the leading US voice on financial regulation. In that case, many observers believe Mr Tarullo would go. His views on regulating Wall Street clash not only with the new president but with the dominant views of Congress, including top Republicans who have been lobbied hard by the big banks. [...]

Putting his own vice-chair in place would clearly ease the way for Mr Trump’s agenda of relaxing US domestic rules on banking and financial services more broadly. Crucially, it would also displace a principal architect of global rules.

Mr Tarullo is an influential member of the Financial Stability Board. And the FSB oversees the Basel Committee on Banking Supervision, which continues to drive through tougher global requirements on bank capital and liquidity. In fact, the latest proposed changes to global Basel rules, nicknamed Basel IV, have been particularly controversial — and particularly driven by Mr Tarullo. [...]

Several European policymakers have spoken out publicly against some core policies of Basel IV, such as the principle of a minimum “floor” for banks’ calculation of the riskiness of their assets, and thus their capital requirements. Valdis Dombrovskis, the European commissioner in charge of financial services, has even suggested that if the rules, due to be finalised in the coming weeks, are too tough, the EU simply would not implement them.

As has been argued before in this column, now may indeed be a bad time for another round of dogmatic rulemaking, given the macro-uncertainties in Europe stemming from Brexit and the region’s broader economic malaise. There is an understandable suspicion in Europe that the principles of Basel IV have been designed to penalise European lenders to the benefit of US institutions: European mortgages, unlike US ones, tend to sit on banks’ balance sheets, making risk weight floors a far bigger issue.

So what happens now? One theory has it that even if Mr Tarullo’s role is unsustainable, he will want to go out with a bang, by pushing through a Basel IV deal at the January summit of the FSB. More likely — and more damagingly — perhaps he will leave, and the world’s efforts to forge a homogeneous post-crisis regulatory agenda become badly undermined. A third way, though improbable, would see Mr Trump commit to retain Mr Tarullo as a regulatory hard man whose global agenda would hurt non-US rivals more than his domestic one would hurt Wall Street. With the enigma that is Donald Trump, anything is possible.

Full article on Financial Times (subscription required)

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