The impact of the global financial crisis on our collective consciousness was so significant that political rhetoric, in the U.S. and in Europe, is yet to escape from its shadow. As the world struggles through a period of anemic growth, banks are still being criticized as if the housing crisis and subsequent economic collapse happened yesterday. During the election campaign, now-President-elect Donald Trump even broke with many in the Republican Party by calling for a reintroduction of the Glass-Steagall Act.
On the other hand, there is a growing recognition that regulatory costs are too high. That recognition has been underlined by the election of the new GOP president, which has raised expectations among U.S. financial institutions that regulations will ease up in the coming years.
That shift is not limited to the U.S. Global regulators too appear to have lost their appetite for toughening rules. Minouche Shafik, deputy governor of the Bank of England, commented recently that legal expenses are stifling the banks’ lending capacity to the tune of over $5 trillion.
This and other signs point to the possibility that international regulatory reform has passed its peak.
For instance, European regulators have delayed their schedule for implementing key rules. At the beginning of this year, the European Commission instituted a one-year delay in the timetable for the Markets in Financial Instruments Directive (known as MiFID II), a massive array of new regulations with the common theme of improved market transparency and investor protection.
The timetable for the implementation of margin requirements for noncleared derivatives has also started to slip back, by different amounts in different jurisdictions. Meanwhile, EU officials are agitating against further reform under Basel III, arguing that European banks will be unfairly weighed down by additional capital increases when compared with U.S. competitors.
The financial crisis reforms, conceived under G-20 initiatives, demanded cooperation from various nations for the international regulatory reforms to work. The immediacy and seriousness of the crisis created a necessary common purpose to bind varied jurisdictions together to implement reforms. Now it seems that the sense of immediacy has faded.
The growth in populist rhetoric clamoring for economic headway to benefit workers has also appeared to blunt support for global regulatory policies.
The pendulum swing from post-crisis cooperation with the rest of the world to anti-globalism messaging was visible in the U.S. election campaign. Both Trump and Democrat Hillary Clinton distanced themselves from global trade agreements, suggesting protectionist policies may be considered as the way forward for a modern economy.
Trump has broken with Republican tradition expressing support for high tariffs, and he has attacked free-trade agreements including the Transatlantic Trade and Investment Partnership under negotiation between the U.S. and the EU.
In the U.K., rhetoric from the government appears to suggest that the country is heading for a “hard” Brexit. Under this option, the U.K. would withdraw from Europe’s single market – in which harmonized regulation is a key characteristic – in exchange for being able to determine the nation’s own affairs, particularly immigration reform. Hardliners concerned about British sovereignty are demanding that the regulation associated with free trade with Europe be thrown on the bonfire – disregarding the fact that much of this regulation is permissive rather than restrictive.
This populist, isolationist rhetoric, both in Europe and the United States, is perhaps the strongest indicator that programs of international regulatory reform are coming to an end. While it is true that this rhetoric includes standard anti-bank pandering, it is also true that for regulation to work, it has to be harmonized. And it can’t be in a divided world.
Meanwhile, all the drama of the election and Brexit has occurred against the backdrop of anemic global economic growth. The International Monetary Fund recently described the world economy as “moving sideways” with growth subpar in 2016. It warned that continued stagnation may fuel anti-trade sentiment and protectionism which in turn could further stifle growth. Weak figuresreleased by the Bureau of Economic Analysis suggest this may be happening already.
It may be well timed that Mark Carney, governor of the Bank of England and chair of the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, wrote in July that the “overall international regulatory and resolution framework for banks is now largely settled.”
All that said, the prospect for a quick reversal of regulatory standards isn’t likely either. The collective will that drives international regulatory reform is weakening, but popular sentiment is such that there is no strong political will for a significant regulatory scale-back.
Instead, the more probable outcome is that the lack of international regulatory coordination will lead to more parochial regulatory regimes. From a strategic perspective, banks will need to maintain a jurisdictional focus to ensure international compliance, while being prepared for the dilution of certain regulatory programs.