German central banker questions U.S. rollbacks on capital, liquidity rules

WASHINGTON — A top European regulator is warning his U.S. counterparts about the risks of being too aggressively protectionist in their regulatory plans, calling some ideas “questionable” while saying others appear justified.

In an interview with American Banker, Andreas Dombret, head of the Department of Banking and Financial Supervision at Deutsche Bundesbank, Germany’s central bank, said some preliminary moves by the Trump administration to curb post-crisis regulations could have dire consequences for global financial stability.

“It is important to guarantee a level playing field, not to look for only ostensible national advantages,” Dombret said. “The U.S. [is] expected to adhere to the agreements concluded and committed. Against this background, the proposed U.S. deregulatory measures regarding capital and liquidity rules are questionable.”

Alex Kraus/Bloomberg

Dombret added that world leaders pursuing a protectionist agenda run the risk of perpetuating “an eternal cycle” in which countries tighten financial regulation after a calamity, only to loosen them again years later, sowing the seeds of a future crisis.

“I am worried that we might enter the next stage of what seems to be an eternal cycle,” Dombret said. “It is time to prove that we are able to learn from experience and prevent this vicious circle from repeating. Strong and harmonized rules are in the interest of every country.”

Dombret specifically cited a handful of proposals as potentially unwise.

He said that a proposal outlined in the House deregulatory bill and echoed in the Treasury Department’s regulatory blueprint that would provide an “off-ramp” for most post-crisis capital and liquidity rules in exchange for a 10% leverage ratio “cannot be justified from a prudential point of view.”

He also noted that the Treasury’s suggested delays of a long-term liquidity rule and unfinished rules governing bank trading books “could lead to an advantage for U.S. banks in case of a preceding implementation within the EU.”

Dombret did not take exception to all of the administration’s proposals, however. He said the administration’s review of Dodd-Frank’s Orderly Liquidation Authority is justified, given the concerns that the crisis raised about institutionalizing moral hazard.

“To prevent moral hazard has been one of the most important lessons learned during the financial crisis,” Dombret said. “Therefore it is a good step to review if the existence of OLA may encourage excessive risk taking by creditors.”

Dombret’s comments come as the Trump administration’s deregulatory bent has spurred European banks to call on their own regulators to either loosen rules or pressure the U.S. not to change theirs.

Observers fear that this jurisdictional fragmentation could lead to a “race to the bottom,” where each country has an incentive to make its rules looser for competitive advantage.

Despite the challenges on the international stage, Dombret, who participates in international negotiations on the Basel Committee on Banking Regulation, said he is optimistic about the prospects that the committee will finalize its final few rules outlined by the Basel III accords (sometimes known as Basel IV). The Basel rules have been a sticking point for years, and regulators initially vowed to have them complete by the end of 2016.

“In the meeting of the Basel Committee last week, the negotiating partners have found more common ground, and I am optimistic that we can reach an agreement soon,” Dombret said. “There has always been a very strong commitment on all sides.”