Unbeknownst to the vast majority of Europeans and Americans, late-stage negotiations are under way to significantly water down all forms of financial regulation on both sides of the Atlantic. This is part of the Transatlantic Trade and Investment Treaty (TTIP) being negotiated behind closed doors.
However, contrary to popular wisdom, it’s not the U.S. government that is leading the charge, but rather an unholy alliance between the European Commission, Wall Street, and the City of London. According to Corporate Europe Observatory, one of the few organizations to report the latest TTIP leak, to understand these new developments, one must first bear in mind the political and regulatory context, both in Europe and the U.S:
The EU is on the brink of concluding its reform agenda in the aftermath of the financial crisis of 2008 with a set of rules that are weaker than those of the US in key areas such as banking regulation. That has already been the source of friction between the two blocs.
The most famous example is probably the attempt of Deutsche Bank’s subsidiary in the U.S. to come under U.S. rules on capital reserves (which require companies to keep aside a proportion of capital available to avoid risk of collapse or bailout)… Considering that Deutsche Bank was one of the largest recipients of bailout money from the U.S. authorities in the aftermath of the collapse of Lehman Brothers and the insurance giant AIG, a demand that it abides by U.S. rules on capital requirements seems entirely legitimate. But this is resented by the European Commission and financial corporations, as are other rules to which EU banks in the U.S. are subject.
The main reason why the European Commission is loath for European banks like Deutsche to have to operate under new U.S. rules is that they are woefully under-capitalized compared to U.S. banks, which themselves are worryingly under-capitalized. It is no coincidence that the central bankers’ central bank, the Bank of International Settlements, decided at the beginning of this year to “ease” leverage ratio rules that would have forced European banks to hold capital equivalent to 3 percent (that’s right: three measly percent!) of its total assets.
A Twisted Alliance
In its attempt to twist the U.S. government’s arm on banking regulations, the Commission is bowing to pressure, both from domestic European banks and their “competitors” (ha!) on the other side of the pond. Too-big-to-fail banks in the U.S. and Europe would like nothing better than to torpedo the U.S. government’s latest efforts to more effectively regulate the sector.
The regulatory black hole commonly known as the City of London also seems to be playing a front-line role in negotiations. Richard Normington, senior manager of the Policy and Public Affairs team at the TheCityUK, a powerful British lobby group, had unreservedly promoted the Commission’s approach. He recently boasted that one of the Commission’s policy proposals, “reflected so closely the approach of TheCityUK that a bystander would have thought that it came straight out of our brochure on TTIP”.
This alliance between EU negotiators and financial lobby groups is now focusing on the long-term option of “regulatory cooperation”, which aims to establish a continuous process of “ironing out” disagreements, divergences, and technical differences between the regulations of the two blocs. In other words, its effects would go on long after the TTIP agreement has been concluded.
To its credit, the U.S. government continues to hold firm against EU pressure. U.S. treasury secretary Jack Lew has repeatedly stated that he opposed the inclusion of financial regulation in the TTIP on the grounds that “normally in a trade agreement, the pressure is to lower standards on things like [financial regulation or environmental regulation or labor rules]”. He also said that the U.S. would “not allow these agreements to serve as an opportunity to water down domestic financial regulatory standards”, or “dilute the impact of the steps that we’ve taken to safeguard the US economy.”
However, given how often and how easily the Obama Administration has caved in to Wall Street’s demands since the financial crisis, it’s probably only a matter of time before the Commission and banking lobby groups get their way. And when they do, banks, hedge funds and insurance companies will be granted even greater control over the regulations governing their activities in the world’s two largest financial markets.
What It Could All Mean
As Corporate Europe Observatory warns, there are myriad ways that the new regulatory approach would impact the financial markets and broader economy. For example, it would:
- Set a “lowest common denominator” regime. Thanks to the notion of “mutual reliance/equivalence/substituted compliance,” U.S. banks would be able to operate in the EU following U.S. rules that are supposed to have roughly similar outcomes, and vice versa. Whenever rules are stricter in one jurisdiction but foreign banks are allowed to operate according to the less strict regime, this will increase pressure on regulators to accept the lowest common denominator. Otherwise, the argument will be made that stricter regulations will result in loss of competitiveness to financial corporations from the other side of the Atlantic. If the government in question still refuses to give in to financial industry demands, the financial institutions affected could demand compensation for “loss of earnings” by taking the country to arbitration (read more here).
- Undermine hedge funds and derivatives transparency. One of the Commission’s proposals is that regulations for “certain transactions” should not cover foreign investors, in particular with regard to “sophisticated investors”. This would effectively mean that regulation on transparency of hedge funds would not apply to U.S. firms, while U.S. rules on derivatives reporting would not apply to European financial firms. It’s worth noting that the unwinding of the derivatives market – now estimated to be worth over 1 quadrillion dollars (more than 14 times the entire world’s annual GDP) – was the trigger of the last global financial crisis, from which we’re still far from recovering.
- Curtail safety rules for investment firms. Investment Europe wants to do away with state-level rules in the U.S. that are meant to prevent insurance companies from engaging in overly risky speculation.
- Undermine the U.S. ban on speculation. Banks in the U.S. – including subsidiaries of European banks – are barred from making risky bets for their own profit with federally insured money (often referred to as “swap desk push-out”). This has annoyed Deutsche Bank and other German banks, who complain that such a demand is “discriminatory” and an example of “unilateral extraterritorial conduct.”
- Restrict national governments’ ability to police mega banks. The U.S. is considering extra capital requirements for foreign banks as well as national banks. This has created a stir in the European financial sector, which feels more comfortable with the lenient and slow approach favored by EU authorities. The lobby group the European Services Forum, which includes some of the continent’s biggest banks, believes it should not be possible for the U.S. to declare a European bank so big that extra capital is needed.
- Allow banks to be “as risky as Lehman”. In the U.S. the leverage ratio, which was recently raised from 3 percent to 5 percent, is geared at ensuring that banks are not quite as risky as Lehman Brothers and have enough rainy-day funds to get them through a crisis. By contrast, in the EU, a ratio at the same level that Lehman Brothers had before it went under will probably be allowed. European banks continue to voice their concern over the U.S. rules as well as fighting hard to stave off the threat of a more restrictive leverage ratio in Europe.
That the European Commission wants to build a regulatory system that would allow not only EU banks, but also US banks, to operate under conditions that are no less risky than those that put paid to Lehman Brothers (and by extension the global economy) is a perfect indictment of just how pathetically little progress has been made since the last financial crisis.
To all intents and purposes, the name of the game remains the same: to protect the banks from all consequences of their reckless actions. If the Commission’s latest plans pay off, it will no longer be a case of the fox guarding the hen house. Instead, the fox will have recruited packs of hyenas to patrol the perimeter fence, jackals to keep watch from the guard tower and vultures to control the skies. The hens are you and I. By Don Quijones.
Quietly, the rules governing global trade and financial markets are being changed. Despite the enormous impact they have on our lives, the public is not consulted. Most people are not even aware it is happening. Read….The Global Corporatocracy Is Nearing Completion
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.