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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Nato’s mission of defending countries from enemy attack is not a million miles from maintaining a hard line on global financial regulation — even if explosions at banks tend to be more metaphorical. So financial policymakers around the world took some comfort from the unity on show among world leaders in The Hague last week: Donald Trump, for the most part, struck a supportive note, as he strong armed allies into pledging a big uplift in defence spending.
The Basel-based Bank for International Settlements has an even longer pedigree than Nato. Founded after the first world war, initially to administer German reparations but also to facilitate co-operation between central banks, it later spawned the Basel Committee on Banking Supervision, which designs global standards for bank regulation. And it hosts and funds the Financial Stability Board, which has a broader remit to guard against financial meltdown. Both organisations thrived in the wake of the 2007-2008 crisis, as the world came together to protect itself from further chaos.
But for all Trump’s pro-Nato bluster last week, he is no multilateralist. And in financial regulation there are clear signs of fragmentation, as the US, on the one hand, begins a deregulatory push that may spread to the UK and EU, and Switzerland on the other ups the ante for its banks.
The timing of America’s more lenient swerve is odd, or suspicious, or both. Just as the Financial Times was last week reporting that investors were fleeing long-dated US Treasuries, unconvinced amid yawning debt and deficit numbers that these assets are really risk-free, the Federal Reserve proposed loosening the capital regime for banks, with a focus on their Treasury holdings.
Regulators said the current requirement, under the so-called supplementary leverage ratio, that banks maintain a quotient of core capital to total assets of at least 5 per cent, would fall to a range of 3.5 to 4.25 per cent — more in line with regimes in other major banking markets.
The Fed also asked for feedback on the idea that it could strip Treasuries from the denominator of the ratio. “Asking banks if they think that’s a good idea is like putting a bag of sweets in front of a group of kids,” said one senior European policymaker, adding that this would create a dangerous precedent for countries around the world to seek to remove government debt from banks’ regulatory capital calculations.
Professed deregulator Michelle Bowman, Trump’s appointee as the Fed’s vice-chair of supervision, promised the overhaul would “enable these institutions to promote Treasury market functioning”. Critics see a clear politicisation of the regulatory regime at a time when the US, faced with a daunting schedule of Treasury issuance, is keen to find new homes for those bonds.
The bigger picture is that US deregulatory initiatives like these risk undermining the globally coherent approach to bank regulation that was solidified after 2008.
Meanwhile, in Switzerland, Swiss authorities are seeking to impose additional capital demands on their big banks to better reflect the risks of their international operations. As UBS, the only bank to be significantly affected, points out, the move could undermine its competitiveness, all the more so given nascent US deregulation. The bank said the proposals would push up its required core tier one capital ratio to 19 per cent, compared with a tally of 12-15 per cent for most US and European rivals.
Those involved with the global regulatory institutions down the road in Basel are watching such fracturing with unease. Even if precise bank rules differ across jurisdictions, they say, it is global coordinators like the Basel Committee that must “define the playing field”.
And it’s not all about banking. There are mounting concerns about risks accumulating in less regulated parts of the financial system. The FSB will soon publish an analysis of leverage risks in non-banks. It is particularly worried about the opacity of private capital risks and their interlinkages with banks and life insurers. And the fast-growing network of stablecoins — backed by “legacy” currencies — is becoming a growing potential source of financial instability, even as US policymakers push the sector enthusiastically, in what may be another effort to boost demand for the Treasuries that underpin them.
Just as now is the time to galvanise Nato, not undermine it, so a properly co-ordinated international regulatory approach can help guard against the detonation of weapons of mass destruction in the financial realm.
