Basel Committee

The Battle for Global Banking Regulations

  • Why it matters

    Why it matters

    After years of talks, European and American financial regulators seem to have reached an impasse.

  • Facts

    Facts

    • European negotiators fear that U.S. demands will lead to excessively high capital requirements for European banks, which could lead to a decline in lending and impede economic growth.
    • The conflict is being waged at the Basel Committee on Banking Supervision, a global body charged with improving regulations after the financial crisis.
    • The Basel Committee has long been the authority on how much capital banks must hold in reserve.
  • Audio

    Audio

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Trading At The Deutsche Bourse
The horns are out between the U.S. and Europe. Source: Bloomberg

Thomas Hoenig has seen his fair share of banking crises in the United States over the last few decades. He saw the recession in the 1980s, when hundreds of savings and loan banks had to pack up. Then came the 2008 financial crisis. After working for the Federal Reserve for many years, the 70-year-old is now vice chairman of the Federal Deposit Insurance Corporation (FDIC). He made a name for himself as a major critic of big banks, and the Wall Street Journal has speculated that President Donald Trump may appoint him to the position of vice chairman of the Federal Reserve.

He is not the kind of person any bank wants to have as an adversary. For German banks, Mr. Hoenig is already proving a powerful adversary in a dispute financial insiders have referred to as an “economic war” that – if it remains unsolved – could mark the end of uniform global banking regulations.

The central issue involves how banks are permitted to calculate their credit risks. This determines how much capital banks are required to hold in reserve to ensure that these risks do not lead to losses. The higher the requirement, the better banks are prepared for new crises. But if it is too high, it becomes difficult for many banks to satisfy the requirement. European banks in particular have had trouble quickly increasing their capital, whereas American banks are already in better shape today.

Of course, this is really about how easily banks can fudge their figures, one experienced banker admits – “What else?”

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