Now that the 2008-9 financial crisis is more than a decade behind us, it might be tempting to overlook the benefits of international cooperation in financial regulation, particularly between Europe and the United States. Let’s not yield to that temptation.
When the leaders of the world’s 20 largest economies met in Pittsburgh at the peak of the 2009 financial crisis, it was clear that international agreements were required to prevent such a global economic extremity from repeating itself. The Pittsburgh agreement established the G-20 as the new permanent council for international economic cooperation and initiated far-reaching policy commitments to make the world’s economies more resilient and to coordinate financial regulation across borders.
The tsunami of international and national regulation that followed is well known to bankers everywhere. In the United States the Dodd-Frank Act was enacted soon after Pittsburgh and stringent stress tests for banks were already introduced before the ink on the official G-20 communique was dry. What’s more, Europe adopted a comprehensive reform program that may have gone even further than that in the United States — imposing stringent capital requirements; stress testing of 70% of banking assets in the European Union; liquidity risk requirements; a resolution framework; and a new single supervisory mechanism for the largest banks in the euro countries.
Many of these measures followed from the creation of what is known as the “banking union” — designed to reduce fragmentation along national borders in the eurozone. The European Central Bank is now the body responsible for supervising the largest banks in the 19 countries that have adopted the euro as their single currency.
Ten years ago, before the world’s economic leadership sat down in Pittsburgh to face the world’s financial crisis, such a comprehensive framework for financial supervision and regulation was not even yet on the drawing board. As a European, but also as CEO of the European Banking Federation, which brings together banks from 32 countries, I am proud to see what has been achieved. Naturally this also affects the European banks that operate in the United States as foreign banking organizations, or FBOs.
But already, unilateralism is trapping capital of foreign banks, contributing to global fragmentation. Since the 2014 introduction of the intermediate holding company requirements, and related enhanced prudential standards by the Federal Reserve, there has been a significant decrease in activity of foreign banks in the U.S. One of the largest foreign broker-dealers saw its assets decrease by more than half between 2010 and 2018.
And the divisive impact has been reciprocated: Earlier this year the European Union implemented intermediate parent undertaking rules, equivalent to the IHC, with consequences for U.S. banks in Europe.
Just recently, in April, the Fed and other federal agencies issued a proposal that may impose additional burdensome requirements on branches of foreign banks, reversing a longtime tradition that branches are supervised by home supervisors, and further contributing to global fragmentation. It is not difficult to imagine that other jurisdictions may follow suit, triggering a further fragmentation of global markets.
We believe that instead of resorting to unilateralism, resulting in market fragmentation and increasing market concentration, U.S. and EU regulators can better ensure a resilient and sustainable financial system by adhering to the long-standing principle of maintaining a level playing field and furthering cross-border cooperation. With further work on these goals, the United States and Europe can continue to build upon the considerable progress made over the last decade.
Should regulators fail to do so, they will undermine the spirit of the Pittsburgh agreement.
