Are Banking Rules About To Go The Other Way?

Trump and Brexit may change how countries approach financial reform

“We will be cautious of regulatory and supervisory arbitrage”

- Silla Brush and Alexander Weber

This is how a race to the bottom can start. In Washington, President Donald Trump has vowed to roll back the financial regulations passed after the 2008 crisis. In London, Prime Minister Theresa May, facing a possible exodus of bankers as Britain quits the European Union, has said she might fight any “punitive” trade measures from the EU with tax cuts or policy changes to attract investors and companies. At the same time, some EU member states could consider relaxed rules to entice London based firms. In Brussels, Europe’s top regulators are angling to soften the latest round of international banking standards.

It wasn’t supposed to go like this. Until last year’s tectonic political shifts in the US and UK, financial regulators had been moving toward tougher rule-making and greater coordination. They’ve tried to stamp out “regulatory arbitrage”—banks moving their riskiest businesses to those jurisdictions with the weakest standards. The lesson of the financial panics of the 21st century, from Lehman Brothers to the European debt crisis, was that crises aren’t confined by national borders.

Regulators have required large global banks to hold more capital, financing more of their lending from equity rather than debt, so they’re better able to weather losses. Lenders are subjected to regular stress tests to assess their risk of failure.