The Bank of England recently confirmed it would delay implementing the new capital regulations in the UK, known as Basel 3.1. These are commonsense rules, put in place to protect the banking sector. Meanwhile, US regulators are reportedly planning significant reductions to capital rules designed to prevent another financial crisis similar to the one in 2008. Both countries’ developments indicate the changing regulatory environment in the two markets, influenced by political changes and economic focus.
Watchdogs in the U.S. are surveying a potentially monumental shift. Specifically, they are considering loosening the capital requirements that mandate large banks hold quality reserves against their riskier holdings, such as loans and derivatives. Among the anticipated changes is a reduction in the supplementary leverage ratio, a key measure that assesses a bank’s ability to meet its obligations without relying excessively on borrowed funds.
The Financial Times first reported these anticipated changes, based on unnamed sources close to the negotiations. This change would have an impact incredibly conducive to former President Donald Trump’s deregulatory agenda. Second, he wants to repeal the financial protections that were put in place after the 2008 crisis. If Trump wails on through to a second term, he promises a “bonfire of regulation.” If successful, this move would produce the most sweeping nationwide rollback of post-crisis regulations we’ve seen in more than 10 years.
In the UK, the Bank of England is closely monitoring the implications of Trump’s return to the White House for the nation’s banking system. Rachel Reeves, the new Chancellor of the Exchequer, has put out a doozy. She thinks some of the regulations adopted in the wake of the Great Recession went too far. She has directed financial regulators to promote more risk-taking. In addition, she wants them to take a fresh look at rules perceived to be slowing the growth and competitive advantage of City firms.
Trump’s promise to lower the regulatory burden on banks has led many to predict these changes to bank capital rules for a long time. Lobbyists say the present regulatory framework unreasonably punishes banks for loading up on assets that are low-risk by definition, like US Treasury securities. There’s increased interest in relaxing mortgage regulations that have tightened, for good reason, since the financial crisis. The Financial Conduct Authority is in the midst of a consultation on these regulations.
After all, the very purpose of post-crisis regulations was to create a more resilient banking system. This new economic framework seeks to protect countries from sudden economic jolts and avoid damaging ripple effects on the international economic order. Materially, regulatory environments are shifting at a dizzying pace. Stakeholders on both sides of the Atlantic are vigorously attempting to strike the balance between risk management and promoting economic vitality.