Trump to hammer nail in coffin of Basel capital standards, economist says

31 January 2017 9:55am

By Neil Roland. First published on MLex Financial Services 11 November 2016.

President-elect Donald Trump will join European regulators in easing implementation of Basel III capital standards, marking the end of the post-crisis period in which stringent oversight was coordinated internationally, a prominent economist said.

“All the financial regulations will be rolled up and tossed into the wind,” said Simon Johnson, a Massachusetts Institute of Technology management professor who was chief economist of the International Monetary Fund. “This is the biggest possible win for Wall Street.”

However, three other former government officials and economists said Trump hasn’t yet tipped his hand on international financial regulation so his regulatory efforts are impossible to predict.

“Who knows?” said Michael Barr, a former senior Treasury official who was an architect of Dodd-Frank under President Obama.

“It’s much too early to say,” said Darrell Duffie, a Stanford finance professor who testifies frequently before Congress.

A former overseas regulator said, “There’s no way to tell at this point.” Trump has staked out anti-Wall Street positions that could lead to stringent regulation, he said.

Congress and Basel

Trump has told reporters that his plans “will be close to a dismantling of Dodd-Frank.”

He hasn’t offered details, but the Republican-controlled Congress is considering a bill that would replace the 2010 law.

That legislation, which has passed the House Financial Services Committee, would provide an “off-ramp” from the Basel III capital and liquidity standards for banks that choose to keep high levels of capital.

“Trump won’t resist anything deregulatory from Congress,” Johnson, the MIT economist, said. “That’s what the banks want.”

The Federal Reserve and other banking agencies would put into effect changes mandated by Congress.

EU relenting

In Europe, meanwhile, European politicians advocating for banks have been pressing the Basel Committee on Banking Supervision to avoid significant increases in capital that lenders must set aside against their risks.

Valdis Dombrovskis, the EU financial-services chief, has repeatedly pledged to reject international plans to increase capital requirements for lenders.

Basel, pushed by the US, is due by year-end to finalize measures meant to make the capital rulebook more uniform.

“Will regulators allow banks to game the rules to reduce capital and leverage? Yes,” Johnson said. “The US and Europe will mutually agree to wind back the standards de facto. Some of this will take a bit of time to be apparent.”

Fintech Regulation in 2018