Policy shift: A pedestrian walking past the Bank of England. If the US version of the Basel rules gets softened under Trump, banks in other jurisdictions including the United Kingdom and Europe would likely warn of a competitive disadvantage. — AFP
LONDON: The European Union (EU) and the United Kingdom will face pressure to delay or soften a planned increase in bank capital requirements now that Donald Trump’s victory is likely to ease the burden on the United States competition.
“There will be voices in the EU and most likely the UK calling for a pause” or changes to the rules after Trump takes the White House, said Sebastien de Brouwer, deputy chief executive officer Europe’s biggest bank lobby, the European Banking Federation.
The rules, known as Basel endgame or Basel 3.1, will impose more stringent capital requirements to safeguard from future crises.
Countries across the world were due to implement them simultaneously but various jurisdictions have since chosen their own timeframes, prompting banks to complain about potential disadvantages.
Some Basel rules “may be further delayed, given uncertainty over the United States implementation” after the Trump victory, said Joachim Wuermeling, a former Bundesbank executive board member in charge of banking supervision.
But “I don’t see a need” for the EU to restart negotiations over the entire set of rules, he added.
Trump’s comprehensive victory earlier this month drove an almost instant surge in the share prices of US banks including Goldman Sachs Group Inc and Citigroup Inc as investors bet that lenders would have an easier time under the new administration.
“President-elect Donald Trump’s win may upend the Basel III Endgame proposal and put the financial sector on a de-regulatory path,” Bloomberg Intelligence analysts Arnold Kakuda and Nick Beckwith said in a note.
“Big US banks are holding US$134bil of surplus Common Equity Tier 1 capital that could be up for grabs for return to shareholders in 2025.”
Wall Street clashed repeatedly with regulators during Joe Biden’s presidency over the new rules.
The initial plans presented by regulators threatened a 19% hike in capital requirements for the biggest banks, but that proposal was cut to 9% in the latest draft of proposals.
If the US version of the Basel rules gets softened under Trump, banks in other jurisdictions including the United Kingdom and Europe would likely warn of a competitive disadvantage and demand changes to their set of rules as well, particularly in globally competitive areas like markets where the Fundamental Review of the Trading Book (FRTB) introduces significant capital changes.
“Given the importance of the United States to international capital markets, how and how quickly the US implements Basel 3.1 matters to UK and EU banks,” said Simon Hills, director of prudential policy at UK lobby group UK Finance.
If the United States decides to slow down changes from FRTB, “EU and UK regulators will need to consider their approach,” Hills said.
A call from bankers to relax rules if the US does too has been met with resistance from some senior EU regulators, who are warning of the potential consequences.
“The Basel framework needs to remain the cornerstone of internationally agreed rules,” European Central Bank banking supervision head Claudia Buch said at a conference on Wednesday.
“Watering down the Basel rules would be self-defeating – it would weaken the guardrails, in particular for globally active banks, and increase regulatory uncertainty.”
Still, the European political tide has already been turning against regulation, with the bloc’s three largest economies recently urging the European Commission to pause new initiatives and ease some existing rules to protect the industry’s competitiveness.
Some European regulators privately said that the outcome of the US election created a difficult backdrop for implementing the Basel rules as planned in Europe. A senior regulatory executive at one of the UK’s largest banks said it would be risky for the country to introduce the rules in the internationally competitive arena of trading while there was so much uncertainty around the US outcome.
The UK has already delayed its implementation of the rules twice and would be loathe to agree another extension, a person familiar with its deliberations said.
A representative for the European Commission said that the EU had confirmed “many times” its commitment to fully implementing the Basel reforms in the announced timeframe.
A representative for the UK regulator prudential regulation authority declined to comment.
The EU is due to introduce most of its bank capital package in January 2025, though it has postponed those affecting banks’ trading businesses to January 2026 in the hopes of aligning with the United States.
The United Kingdom has delayed its entire package until 2026.
The United States timeline remains unclear.
Much will depend on what Trump’s administration does.
“It’s early days and there are much broader issues,” said Nicolas Veron, a senior fellow at think tank Bruegel, adding that it was “difficult to see” how Trump would square the promises of his election campaign on everything from low inflation, high tariffs and low interest rates, as well as easing banking oversight. — Bloomberg
