financial regulation

A Dangerous Game

  • Why it matters

    Why it matters

    The author warns that an end to international cooperation could spark a renewed race to deregulate.

  • Facts


    • In 2009, the G20 agreed to tougher financial regulation to avoid a repeat of the 2008 crisis.
    • The introduction of Basel IV, a key element of this regulation, was slated for January but has been delayed.
    • Mr. Trump has signed an executive order to review the Dodd–Frank Act, signed into law by former president Barack Obama in the wake of the financial crisis to protect consumers.
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G20 Finanzministertreffen
G20 finance ministers voiced their support for the Basel IV reform over the weekend, but the Trump administration is yet to declare its position. Source: DPA

It was meant to be a new beginning. One year after the U.S. investment bank Lehman Brothers went bankrupt, the heads of government and state of the leading 20 industrial and emerging nations met in Pittsburgh and agreed to nothing less than a new world financial order. The German finance minister at the time, Peer Steinbrück, was downright euphoric when he said “the community of nations is acting in concert.”

Eight years later, the fabric of a world so successfully woven is threatening to unravel. The new U.S. administration under President Donald Trump doesn’t seem particularly interested in international cooperation – on this or other issues. It is threatening a new wave of deregulation, acting on its own national interests and abandoning concerted action for a stable and secure global financial sector.

It is imperative that something is done to counter this.

The international community of nations has achieved much since the 2009 G20 summit in Pittsburgh, particularly in putting banks on a more solid footing. Governments have significantly ramped up the capital requirements of financial institutions and forced banks to have more liquid assets at their disposal, and refinance more soundly. The banks were required to present testaments and handbooks to help liquidate them as smoothly as possible in case of a crisis. And, as agreed back then in Pennsylvania, the banks can make their executives liable for serious mistakes in the future by demanding back bonuses.

These are all major advances designed to prevent just such a financial crisis like the one of 2008 being repeated.

President Trump's goal is obvious – to lift as many of the regulations imposed on the banks as possible.

But we now face the threat of a significant setback to this progress. In fact, the final major building block in the new global financial architecture was supposed to be inserted this last January.

The regulation, known in the banking sector by the nickname Basel IV, is a stricter method that lenders would have to use to calculate their own future capital requirement. This weekend, the G20 finance ministers once again spoke unanimously in favor of the reform. But it is bogged down in negotiating the details. The new U.S. administration has so far given no indication of what it thinks of the plan. Considering Mr. Trump’s well-known aversion to multilaterally agreed rules, there is as little hope here as on trading policies.

Besides, the United States appears to prefer to forge its own path on banking regulations. President Trump has signed an executive order to review the Dodd–Frank Act, a Wall Street reform and consumer protection act signed into law by President Barack Obama in the wake of the financial crisis. The goal is obvious – to lift as many of the regulations imposed on the banks as possible.

German Finance Minister Wolfgang Schäuble quite rightly points out that, almost a decade after the financial crisis, it is perfectly reasonable to re-examine a regulatory net that has become vastly more stringent and dense. After all, the European Union is also in the process of reviewing whether the many thousands of new guidelines in the present legal framework have created any inconsistent, overlapping or even contradictory rules.

Mr. Schäuble insists he is not worried that the United States could turn away from the common regulatory standards. “That’s not a big concern,” he said on the sidelines of the G20 finance ministers meeting he led this last weekend in Baden-Baden. But this suggests a healthy dose of wishful optimism on his part. After all, the German G20 presidency certainly doesn’t want to become the gravedigger of international cooperation on financial regulation.

Indeed, time and time again, countries have gone their own way on regulation in recent years. And there have always been major structural differences between the banking systems in the United States and in Europe or Asia, resulting in differing sets of rules. But ever since Pittsburgh, the G20 consensus has been an important framework that has intensified long-standing international cooperation between regulators through the so-called Basel Committee on Banking Supervision.

With a U.S. administration no longer particularly interested, there is a great danger this type of cooperation will languish. In the short term, Europe’s major banks will probably be quite comfortable with that because, in contrast to U.S. financial institutions, they would be particularly affected by the planned Basel IV rule.

But drifting apart in this way would be fatal in the long term. There is a great danger of an end to the international dialog leading to a renewed race to deregulate. The consequences this might have were impressively demonstrated on September 15, 2008, with the failure of the U.S. investment bank Lehman Brothers.


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