A top U.S. official has said that if Donald Trump’s administration repeals global rules imposed in the wake of the financial crisis, some U.S. financial institutions could be locked out of the European market.
International rules agreed during the 2007-09 crisis must be upheld to avoid undermining financial stability, said Valdis Dombrovskis, vice president of the European Commission and the EU’s financial services chief.
“International finance needs international regulatory cooperation. Without it, we run the risk of regulatory arbitrage and renewed instability,” Dombrovskis said in a speech in London.
Dodd-Frank, a U.S. law that implements a welter of international rules agreed by the United States, the EU and other major economies and one that was made during the global banking meltdown, has been intended to be reviewed by the U.S. President Donald Trump who signed an executive order last week to that extent.
“We are sensitive to talk of unpicking financial legislation which applies carefully negotiated international standards and rules,” Dombrovskis said.
“Lax regulation in one country can create conditions for inadequate regulation and contagion throughout the world.”
The EU will be “ready to take the necessary measures to protect and strengthen these achievements” and it will uphold the reforms it introduced to toughen bank capital rules – based on the globally agreed norms, Dombrovskis said.
Since the EU deemed their home rules to be “equivalent” or as strict as those in the EU, it has allowed clearing houses, insurers and other financial firms from the United States and other non-EU countries to operate in the bloc.
But the specific conditions of individual sectors and countries when the decision was made are the deciding factor for granting equivalence, he said.
“If these conditions change, we will have to reassess the situation,” Dombrovskis said.
By giving a month’s notice, an equivalence decision can be unilaterally scrapped by the European Commission.
After Britain leaves the bloc in 2019, its financial firms may need to rely on “equivalence” rulings and hence Dombrovskis’ warning could equally apply to the country. Departure would allow Britain to ditch some EU rules, some pro-Brexit campaigners say.
He however said that a strong, international regulatory system is the only basis that London will only continue to thrive as an international financial centre.
At the Financial Stability Board (FSB), which coordinates regulation across the Group of 20 economies (G20), and bodies like the Basel Committee on banking standards, questions about future international rulemaking were raised by Trump’s regulatory review.
Signs of discord between the United States and other members over regulation would be sought from the communiqué of the results of the meeting of the G20 finance ministers and central bankers in Germany in March.
There was a need for “partners to cooperate with” to achieve the strong arguments for continued international cooperation at Basel and the FSB, Dombrovskis said.
A letter that told U.S. Federal Reserve Chair Janet Yellen not to negotiate new international banking rules from a U.S. lawmaker was singled out by him.
When threatened by “alternative facts” in financial and other sectors, there was a need to preserve European values like free rational thought, tolerance, solidarity and openness, Dombrovskis said.
(Adapted from CNBC)