Internationalisation of US bank regulation questioned

Author: Edward Price | Published: 19 Sep 2016
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The Clearing House Association (TCH) is questioning whether the automatic internationalisation of prudential bank regulation is appropriate for the US. Counsel note how other jurisdictions, principally the European Union, are also calling into question the capital requirements.

According to the Jeremy Newell, general counsel of The Clearing House, the post-crisis regulatory framework saw a substantial trend toward referring to the Basel Committee on Banking Supervision (BCBS), Financial Stability Board (FSB), and other international standard-setting bodies as principal instruments of policy development. Global policymakers made a concerted effort to coordinate their response to the crisis through these bodies, led by the G20.

A recent article by Newell, Rethinking the Internationalisation of US Bank Regulation also presents data that make clear the increasing presence of the BCBS in non-capital-related regulation (see figure 2 below). Prominently, the number of the Committee’s releases dealing with liquidity-related regulation significantly increased between 1975 and 2015.

That’s a shift from the historic BCBS focus on capital requirements, and the reason the Basel Accords came about: ensuring an international level playing field for capital. But within the long-run trend to increasingly internationalised global regulation, counsel are also identifying more recent shifts.

“Eight years after the explosion of the financial crisis, the question now is ‘are the US, EU and Basel countries rowing in the same direction or not?’,” said V. Gerard Comizio, partner at Paul Hastings. “The mere fact we’re asking this question raises some real questions for BCBS. The entire premise of BCBS was to reach global minimum standards on bank regulation."


  • The Clearing House Association is questioning whether the automatic internationalisation of prudential bank regulation is appropriate for the US;
  • That prudential regulations are automatically set as international standards by BCBS is an assumption that should be questioned;
  • Counsel in the US also note that the EU is pushing back on global rules, principally bank capital requirements;
  • When the UK exits the EU, it’s likely the result will be regulatory competition between jurisdictions;
  • While European authorities have reviewed the economic impact of regulation, their US counterparts have declined. 

With prudential regulation set internationally, but jurisdictions showing signs of moving in different directions, problems may arise. The Basel Committee has always attempted to set floor regulatory standards that avoid regulatory arbitrage – that might now be under threat.

“The real question for the EU, UK, US, BCBS and those who follow BCBS is, if countries go their separate ways, do you create regulatory arbitrage within the Basel membership?,” said Comizio. 

According to Newell, there is an essential role for the Basel Committee: building international convergence and a level playing field around capital.

“There’s an enormous potential for BCBS to do good; it’s just that we should always be sure to ask which rules are good rules to be made internationally,” he said.

The idea is that addressing why certain rules are made internationally will only make the Basel Committee’s work stronger. It might also make sense if jurisdictions are to some degree drifting apart.  

Post-crisis rush

According to Newell, international regulators understandably rushed to write new rules after the 2007-8 global financial crisis, although their haste was less evident in capital regulation. There, the Basel Committee was making changes to an existing bank regulatory framework.

“But with the liquidity framework, which was new, I think it’s fair to at least ask questions about whether those standards are appropriate to set at the international level,” said Newell. 

Newell’s point is that, even if it is appropriate to make a rule internationally, developing rules at a granular level of detail, something true of liquidity regulation, may not always be the right approach. Instead, a wider debate is needed over why rules should be written at the global level.

Jeremy Newell, general counsel of The Clearing House

“You don’t hear the Basel Committee or others addressing why it’s important a certain initiative is as international standard rather than a national standard,” said Newell. Instead, the assumption is that prudential regulations should automatically be crafted as an international standard set by BCBS.

Perhaps the time to question that assumption is now. For one, the UK’s June 23 vote to exit the EU may result in regulatory competition between the EU and UK. “There will be significant pressures to diverge and compete,” said Christopher Bates, partner at Clifford Chance in London at a recent industry event on Brexit. And other countries may yet leave the EU.

“I don’t think it will come to the UK and EU undercutting each other on regulation,” said Richard Farley, partner at Kramer Levin Naftalis & Frankel. “But once you create the template for an EU exit, the anxiety about doing so minimises for other countries that might seek to exit for economic advantage,” he added.

If the UK does in fact work to undercut the EU, that in turn could also affect the competitiveness of the US. “If the post-Brexit UK deregulates, it would give them an advantage that I don’t think the US would have the political appetite to follow,” said Farley.

"Are the US, EU and Basel countries rowing in the same direction or not?"

Naturally, the exact direction that Brexit and it regulatory impact will take is unknown. But what’s clear is that Brexit is unlikely to fundamentally impact international bank regulation in terms of the way the Basel Committee operates – it’s the Bank of England and other national supervisors that compose its membership. 

“Brexit isn’t likely to have a major impact on the Basel Committee’s structure,” said Newell. 

So while Brexit does risk a degree of UK-EU regulatory incoherence – it’s unlikely the immediate future will see the global approach to regulation abandoned.

“I don’t see any current signs of a move away from global regulation right now,” said Newell. 

The US also seems especially unlikely to loosen up – both presidential candidates seem fond of bashing big US banks.

Different economies 

Economic pressures might also lobby for a more jurisdiction-specific approach to the design and implementation of bank sector regulation. The US and EU have experienced markedly different recoveries since 2008. And according to Newell, the bank-reliant EU has subsequently realized that capital and liquidity and other regulations can meaningfully handicap banks’ ability to support economic growth.

“That realisation has not yet occurred in the US,” said Newell. 

“The EU is pushing back on capital requirements a little bit, and there is some concern about the US AML and MBS-related prosecutions of EU based banking organizations,” said Comizio.

Perhaps that European epiphany was inevitable, given the EU’s lack of the capital market optionality enjoyed in the US. But it was also helped along by the European Commission’s public call for evidence on the impact of prudential regulation on the real economy. 

That leads to a further question: will the US decide to conduct its own regulatory impact assessment? It seems not. When questioned by industry in July as to whether the US would pursue a similar public review, Federal Reserve Board governor Daniel Tarullo demurred.

“I think this notion that somehow you can put together a very big model, in effect, that plugs in every regulation and looks at cumulative effect, I think that’s probably not something that’s realistic,” Tarullo said. 

So, two contradictory forces remain in play. Almost a decade after the financial crisis, prudential bank regulation is still decided internationally. Some jurisdictions, however, are more keenly assessing the impact of regulation on their economies than are others.   

See also

Clearing House
Annual BCBS releases by topic (1975-2015) (Source: The Clearing House)