First it was free trade, then the Paris climate agreement. Now, European lawmakers are warning that President Donald Trump’s anti-globalist agenda threatens to erode years of cooperation on financial regulations forged after the 2008 crisis.
European Parliament members are traveling to Washington this week to meet with top lawmakers and other officials, where they can air their concerns about the U.S. commitment to international rules. The meetings come amid moves by the Trump administration and Congress to roll back bank regulations.
“The recommendations, especially coming from the Treasury Department, are constituting a kind of ‘America first’ policy in financial regulation,” said Markus Ferber, a vice chairman of the parliament’s economic committee. This is a “considerable deviation from our international agreed standards,” he said. “We have the feeling that the United States is going to leave this path.”
In withdrawing from the landmark Paris climate accord in a speech last month, Trump declared that he was elected to represent “Pittsburgh, not Paris,” underscoring his vow to put America’s interests above global concerns.
For EU bank regulators, it was a curious choice of locations for Trump. It was in Pittsburgh, at a G-20 meeting in 2009, where world leaders recognized the need to work together to rescue and regulate the financial markets after the worst crash since the Great Depression.
“For us, Pittsburgh is still valid,” said Ferber, a German representing Bavaria who is aligned with Chancellor Angela Merkel.
Facing financial instability and mounting unemployment in the U.S. and EU, the world leaders agreed in September 2009 to require banks to bulk up on capital so they could withstand future shocks. They committed to centralize trading in derivatives, the unregulated financial instruments that helped spark the credit meltdown. And they approved the overhaul of rules for executive compensation that had encouraged excessive risk taking.
The U.S. House passed legislation last month that would gut many of the post-crisis banking reforms, and Trump’s Treasury Department is proposing to curtail some key regulations.
Trump, in setting the tone at the top, is clearing the way for a weakening of crucial regulations, said Martin Wheatley, who headed the U.K. Financial Conduct Authority until September 2015. A breakdown in regulatory cooperation risks seeding the next financial crisis, he said. “We shouldn’t forget that.”
During their meetings in Washington and New York this week, the Europeans will voice those worries to American financial regulators and lawmakers. Among them: Jay Clayton, the chairman of the SEC, Christopher Giancarlo, the head of the Commodity Futures Trading Commission, and Stanley Fischer, the vice-chair of the Federal Reserve Board.
They’re also scheduled to meet with officials from Trump’s National Economic Council. On Capitol Hill, the members of the European Parliament will talk with powerful lawmakers, including Senate Banking Chairman Mike Crapo and Rep. Peter Roskam, chairman of the House Ways and Means subcommittee for tax policy, before heading to New York.
The U.S.-EU divergence on regulation focuses on agreements reached since the financial crisis in the city of Basel on the Rhine River in Switzerland. There, U.S. banking regulators and their counterparts from around the world have drawn up banking rules for countries to follow. The U.S.’ new hesitancy to advance Basel regulations has Ferber and other Europeans displeased.
Ferber mentioned two items in the Basel banking standards: one, called the net stable funding ratio, which tries to ensure that banks have enough liquidity during a crisis, and another aimed at reining in trading risks for the lenders. In a June report, the U.S. Treasury Department recommended delaying implementation of both standards, saying these regulations would pile unnecessary burdens on banks.
In a July 12 speech, the Governor of France’s central bank, François Villeroy de Galhau, criticized the Treasury.
“Such changes would be completely different and would be a source of great concern for all,” he said. “Any temptation of competitive deregulation would be a lose-lose game, which would increase the risk of a new financial crisis. International cooperation on financial-sector regulation is our common good.”
Nicolas Véron, a senior fellow at Bruegel, a Brussels-based think tank, says the Europeans are overreacting.
There is no real evidence that the U.S. is ripping up agreements, said Véron, a visiting fellow at the Peterson Institute in Washington.
The Treasury report was hardly draconian, he said, and many of the people Trump has appointed to regulate financial markets are considered moderates, including Randal Quarles, who has been picked to become the Fed’s top regulator.
The Europeans “are right to complain about trade and climate, but at this point I wouldn’t extend that to financial regulation,” Véron said.
Yet for global financial companies, antipathy over financial regulation poses a major risk: retaliation.
In November, the European Union proposed to force U.S. banks with significant operations on the continent to establish separate holding companies to keep capital and liquidity in the bloc. Banks are concerned that they will be hit with higher costs and decreased flexibility in times of market stress.
Bankers saw the move as retaliation for a U.S. regulation that required all the largest banks to set up holding companies.
U.S. companies are closely watching to see if EU officials go ahead with that move.
“I do fear that we are on the edge of the precipice” with regulations fragmenting, said Jeremy Newell, an executive managing director at the Clearing House, a lobbying group for global banks, who was also speaking in Paris.
That, Newell said, “would have enormous costs.”