The European Union’s financial-services policy chief urged U.S. President Donald Trump not to walk away from global financial rules put in place since the crisis. “We are sensitive to talk of unpicking financial legislation which applies carefully negotiated international standards and rules,” Valdis Dombrovskis, a vice president of the European Commission, said in London on Friday. Trump has vowed to roll back financial regulation, and since taking office he has begun to pull the U.S. out of international agreements such as the Trans-Pacific Partnership trade deal.
The U.S. has “every right to change its approach,” Dombrovskis said, according to the text of a speech distributed by his office in advance. “But as friends and allies, Europe is entitled to gently suggest international cooperation on financial governance is in everyone’s interest.”
Dombrovskis’s comments echo a warning earlier this week by European Central Bank President Mario Draghi, who said that a rollback of financial regulation is “the last thing we need at this point in time.” Draghi, while also defending Germany against U.S. claims that it’s a currency manipulator, said that he doesn’t see any reason to relax rules meant to prevent a repeat of the 2008 financial meltdown.
Stress Tests
The Trump administration has demanded that regulators produce a study on financial rules within 120 days as a first step toward unwinding safeguards put in place by Barack Obama. Regulations that Trump plans to target include a ban on proprietary trading, a requirement that risky financial companies be subject to tough Federal Reserve oversight and rules for winding down failed banks.
Senator Pat Toomey has urged Fed Chair Janet Yellen to abolish stress tests of banks, arguing that they hamper lending, burden banks with unnecessary costs and hurt economic growth. Earlier, House Financial Services Committee Vice Chairman Patrick McHenry said the Fed and other regulators should halt talks over international agreements until Trump has a chance to review their work and replace top negotiators.
“It is difficult not to notice when the chair of the Federal Reserve is criticized for her approach to negotiating international rule and standards, or when an American president talks about ‘doing a big number’ on Dodd-Frank,” Dombrovskis said. Trump’s transition has already stalled talks at the Basel Committee on Banking Supervision, which is trying to wrap up work on the capital framework known as Basel III. The EU and U.S. are in a standoff over new measures meant to stop banks from gaming the rules.
Regulatory Cooperation
Fractures in the regulatory landscape would expose financial centers from London to Singapore to risks imported from places with less stringent rules, Dombrovskis said. Banks would also be tempted to engage in regulatory arbitrage, accumulating under-regulated activities and putting “the whole financial system at risk,” he said. “Lax regulation in one country can create conditions for inadequate regulation and contagion throughout the world,” he said. Dombrovskis also called on the U.K. not to give up on international regulatory cooperation after it leaves the EU. “Whatever the future relationship between the U.K. and Europe, a strong commitment to international regulatory cooperation and internationally agreed standards should underpin it,” he said. “We very much hope to continue working with all our partners internationally, but this is not only in our hands.”
