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Unilateral deregulation by the USA would lead banks to seek new trade-offs

Solvency, liquidity, transparency and oversight requirements: as the Basel Committee meeting in Santiago, Chile in November 2016 demonstrated, there is still much to be discussed on the finalisation of the Basel III agreements. However, the inauguration of the new President of the USA could change the condition of the international dialog. Some might decide to review and to loosen unilaterally part of the current regulations. The possibility comes following a study undertaken by the U.S. administration with the aim of repealing part of the Dodd-Frank Act, as well as the recent declarations by Patrick McHenry, vice chairman of the US House of Representatives financial services committee, calling on Janet Yellen, chair of the Board of Governors of the US Federal Reserve System, to withdraw the Fed from international forums on financial regulation.

Repealing or redrafting the Volcker rule within Dodd-Frank alone could be enough to have a major impact on the current competitive landscape.  Should the USA banks be able to conduct proprietary trading activities or have more flexibility to manage their market-making portfolios, European banks, and particularly British and French Corporate and Investment banks, would still be barred from involvement in these activities by measures introduced by the French law on banking separation or the Vickers report.

This prospect would dispute what appeared in essence to be the final objective of the G20: to create a regulatory environment which, without being identical, would apply in a consistent way to banking all over the world: a transnational regulatory environment for a transnational industry. Unilateral deregulation would lead to a resurgence of regulatory arbitrage between economic zones, and competitive conditions would clearly be thrown up in the air.

On this side of the Atlantic, regulatory development, while far from being complete, covers multiple and highly technical issues such as restricted and restrictive use of internal models, the introduction of floors for specific parameters, and capital floors where advanced models are used. Momentum for the strengthening of bank capital requirements is such that professionals, to underline the impact, prefer to call it Basel 4. This also serves as a reminder that a whole range of measures taken over nine years ago have already come into force and brought significant increases in solvency ratios, the introduction of liquidity and leverage ratios, tighter regulation of bonuses, and bans on certain activities such as “proprietary trading”.

This trend is continuing in 2017, with:

-a progressive rise in various buffers or surcharges which are added to the minimum ratios of Core Equity Tier One (CET 1). Systemic, individual and countercyclical conservation buffers explicitly increase capital requirements;

-the end of “transitional” periods, which would allow partial extraction or filtering of certain assets in the CET 1 bases for calculation. Deferred Tax Assets (DTAs) will no longer be filtered in the year end prudential capital calculations, creating a de facto constant ratio increase in the capital requirement;

-the application of Total Loss-Absorbing Capacity (TLAC) and Minimum Requirement Eligible Liability (MREL) constraints which are promoting a reorganisation of the overall structure of banking liabilities from capital to customer deposits and making explicit the “tranching” of current liabilities usable in resolution plans;

-the entry into force of European Market Infrastructure Regulation (EMIR) which, via the obligation of compensation for Over The Counter (OTC) derivatives in tandem with the short-term liquidity coverage ratios (LCR), implicitly increases liquidity requirements.

Caught between deregulation on one side, and explicit and implicit increases in solvency and liquidity requirements on the other, banks may once again be led to rethink their strategies and their legal, geographical and human organisational structures.

A French version of this article was published in the Agefi Hebdo on 02/03/2017

Emmanuel Dooseman

Global Banking Leader

Emmanuel is leading our Banking Practice and is head of our Corporate & Investment Banking group. He has more than 20 years’ experience in Capital Market & Trading serving as a banker, a consultant and an auditor. Emmanuel started his career in 1996 as a money market trader in the Treasury Department of Credit Commercial de France (HSBC France). In 1998, he joined Mazars Paris office and was involved since then in Capital Market audit and advice for various clients within the Corporate & Investment Banking industry in France, Europe and the US. Emmanuel is specialised in Fixed Income and Equity Trading (Cash and Derivatives), Arbitrage, Derivative Structuring, Structured Finance, Asset and project financing. As an expert on financial instruments he supports assignments dealing with valuation policies, governance and process for financial instruments, risk measurement methodologies and framework, and risk management. He is also in engagement partner for statutory audit of systemic...



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