Europe is rattled by U.S. President Donald Trump's pledge to tear up the post-crisis Dodd-Frank rulebook. Where the White House sees a fix to a broken U.S. banking system, officials across the Atlantic see a threat to global financial stability -- and no doubt a worrisome leg-up to American banks' already dominant market share, as my View colleague Mark Gilbert has argued.
The bluntest assessment comes from ECB chief Mario Draghi, who told the European Parliament a financial deregulation drive is the "last thing" anyone needs right now. Then there's EU Commissioner Valdis Dombrovskis, who almost a decade ago guided his home country of Latvia through financial crisis. He reminded his Twitter followers that international regulatory cooperation was "vital" to responding to the 2008 meltdown. It's too early to know how successful the Trump administration will actually be in gutting strongly entrenched rules. But Europe is worried.
Its strong words hide a soft center, though. A bunfight over global financial regulation looked probable well before Donald Trump's election. It looks downright inevitable now. As frustrating as it would be to see America dump rules designed to prevent a crisis that its own banks created, it would be acting from a position of strength. Europe will probably succumb to the temptation of giving its own, weaker banks extra protection.
The U.S. had before now been much tougher than Europe in its support for new post-crisis capital curbs, nicknamed Basel IV. Before Trump's election, it was European officials who were threatening to unilaterally turn their backs on measures deemed too onerous. Their frustration is perhaps justified, given European banks have most to lose, but it shows how self-interest is already taking priority over financial stability.
Basel IV is likely to be a sacrificial victim of Trump's Dodd-Frank rollback, assuming the U.S. and Europe remain at loggerheads over its strictness (which is probable). That may not shackle lending further but it won't do much to help investor confidence or bank credibility.
Protectionist spats are flaring up elsewhere too. The U.S. has taken a strict line on forcing big foreign banks to bolster their balance sheets on American soil, a move that pre-dates Trump. Fair enough: the Fed doesn't want a repeat of 2008, when it doled out $538 billion of emergency loans to European banks with U.S. operations.
Yet this has exposed European banks' comparative weakness when forced to play by the same rules, with Deutsche Bank AG and Banco Santander SA flunking stress tests that dozens of American banks passed. Rolling back Dodd-Frank would embolden Europe to carry out its threat of tit-for-tat measures for U.S. banks on its own turf. Protectionism is likely to be an easy sell to voters and a tempting response, despite the rhetoric.
Europe's fears about the U.S. becoming an unreliable partner have the ring of truth. Trump is no backer of past G-20 pledges to reform finance and liberalize trade. But Dodd-Frank's potential replacement, the Financial Choice Act, is hardly a vision of unfettered financial excess. The proposal offers an exemption from Basel rules to banks that have a robust leverage ratio of 10 percent: five percentage points above the U.S. minimum and seven points above the proposed EU minimum. Dodd-Frank's death seems as likely to create boring banks as it does casinos.
Trump didn't invent regulatory arbitrage. But it looks like he will make it worse. Meanwhile, Brexit will no doubt unshackle the U.K. from much of a sense of collective responsibility. Europe's taken the moral high ground so far, but don't expect it to last. The U.S. taste for protecting valuable industries by lightening their regulatory burden will probably catch on from London to Latvia.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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