European financiers want fewer rules. Their regulators want to hold the line. The gap between the two is widening fast.
Slawomir Krupa, chief executive of France’s Société Générale SA and president of the European Banking Federation, keeps a magnet on his desk. It reads: “Stop Basel Endgame!” It is a daily reminder of what he considers the most effective bank lobbying campaign in history — one that was won, frustratingly for him, on the other side of the Atlantic.
US banks fought hard against a threatened 16 per cent increase in capital requirements, a package some estimated would carry a $160bn cost. They won. US President Donald Trump’s administration reversed the increase, eased supervision, and vowed to unshackle banks from what it saw as excessive post-2008 constraints. Wall Street celebrated. European lenders watched, and waited.
Catching up with Washington
The wait, Mr Krupa believes, has gone on too long. “I think we lost two years,” he said, referring to European banks’ efforts to achieve meaningful reform. In public appearances, he and other chief executives have made little effort to hide their frustration. European banks continue to trade at a discount to their US peers, even though the gap has narrowed.
Relief, of a sort, arrived last month. The European Commission published a package of proposals that could release hundreds of billions of euros in capital and liquidity trapped by national ring-fencing. It also opened the door to changes in parts of the global capital accord most fiercely resisted by European lenders. “It’s a resolute step in the right direction for the first time in years,” Mr Krupa told Bloomberg of the proposals.
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The most concrete result so far has been the EU’s deferral of a portion of the new global rules known as the Fundamental Review of the Trading Book, or FRTB, until there is clarity on the US’s own plans. The FRTB increases capital requirements for trading, an area where European banks compete directly with Wall Street.
Early adoption would have put European lenders at a disadvantage. At Deutsche Bank AG’s earnings day last month, chief executive Christian Sewing said he was “encouraged” by the increasing focus on “simplification and growth.”
The floor that matters most
The centrepiece of the debate is the output floor. It is a rule designed to stop banks gaming internal risk models to cut their capital charges. Under the Basel III framework, banks cannot go below 72.5 per cent of requirements calculated under the standardised approach. The US has already said it will not apply the rule, a move with limited domestic impact since American banks do not use internal models to calculate credit risk. For European banks, which do, the stakes are far higher.
I think some have the view that you can compromise everything else, but not monetary policy independence. I understand that, but it’s super sad. — Phil Esho, ex-Basel Committee secretary
The Commission’s willingness to review the output floor delighted European lenders. It also alarmed Neil Esho, who stepped down as secretary general of the Basel Committee on Banking Supervision in March. “Basel III, in a nutshell, it is the output floor,” Mr Esho said in an interview with Bloomberg. He warned that copying the US approach would be “a big step too far”, and that abandoning the rule altogether would be “a disaster” .
Mr Esho described the EU move as part of a “race” between authorities in the US and Europe to soften the blow of Basel III. He said the race was “not necessarily to the bottom” but could still be dangerous. “They are chipping away, chipping away, and making things slightly, slightly weaker, and the question is if they do go too far,” he said. His broader concern is structural: “Governments are desperate for growth and they’re looking for any opportunity to do that through supervision and regulation.”
Regulators dig in
European regulators share some of that unease. A big obstacle to the Commission’s plans remains the European Central Bank, where officials believe the output floor should stay in place as it is. Maria Luis Albuquerque, the EU financial services commissioner in charge of delivering the reform package, acknowledged the tension. “We’ll have to also have a proper dialog with our supervisors, and we need to find the right balance,” she said.
The difficulty of that balance helps explain why European banking stocks did not rally when the Commission announced its proposals. Wim Mijs, who runs the EBF day to day, described the initiative as a “breakthrough”. But he also pointed to a credibility gap. “It’s all about certainty, because in the US when there is a speech by Miki Bowman everyone believes what she says, and especially the market,” Mr Mijs said, referring to the Federal Reserve’s top supervisor.
That credibility gap reflects a deeper problem. The 27-nation EU must reconcile reluctant supervisors, member states with divergent interests, and a Commission keen to be seen as acting independently rather than simply imitating Washington. The direction of travel in the EU package is not as dramatic as the easing in the US or the UK. It does not directly address capital levels. But lobbyists view the American actions as the key catalyst; the proof that deregulation is politically possible.
Trust, and the lack of it
Behind closed doors, the transatlantic rift is widening. Senior European central bankers and watchdogs, speaking anonymously to Bloomberg, said the US approach had spilled over into fraught meetings at international forums, including the Basel Committee. One veteran European policymaker said that in nearly two decades at the global regulatory table, he had never seen a bigger divide in how US and European officials view threats to financial stability.
It’s a resolute step in the right direction for the first time in years. — Slawomir Krupa, Société Générale
Mr Esho — himself no advocate of reckless loosening — is candid about what has changed. He does not “expect anything of great substance to change if it needs international agreement.” He worries that it could be “difficult” to ensure smooth international coordination in times of crisis. And he is troubled by what he sees as a new dynamic in US engagement: positions now arriving directly from the Treasury, rather than from independent regulators.
“There is definitely a lack of trust,” Mr Esho said. “I think some have the view that you can compromise everything else, but not monetary policy independence. I understand that, but it’s super sad.”
