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Opinion 21 January 2020

U.S. banking regulation: a change in the trend

Matías Cabrera, Regulation Manager at BBVA, analyzes the changes the Trump Administration has made to bank regulation and how they affect financial institutions in the U.S. A  new paradigm in financial regulation that could spread to other places, especially European banks.

While EU banking regulation has become more stringent in recent years, the U.S. has witnessed a significant paradigm shift, with a greater focus on adjusting and simplifying regulatory requirments. This change began in February 2017 with an executive order from President Trump that established a series of fundamental principles that financial regulation must govern. It also included the goal of making regulation more efficient and better adapted to the situation of each bank. Using these principles, the Treasury prepared a series of recommendations for regulatory changes that would serve as the foundation for the bill that Congress later approved on May 2018, the “Crapo Bill”.

This law represents the most significant legislative change since the implementation of the “Dodd-Frank Act”. Although the new law does not repeal Dodd-Frank, it does soften it and change the regulatory burden, especially for small and mid-sized banks. The biggest difference in the Crapo Bill is the higher asset threshold for banks considered “too big to fail”, which are therefore subject to much stricter supervision and regulation in terms of capital, liquidity, stress tests and information disclosure.

But the details on the implementation of this law were not revealed until the end of 2019. This is due to the fact that in the U.S., laws do not contain a great deal of technical information, as the regulators are the ones who work on the specifics. In October 2018, the agencies published the final regulations applicable to domestic banks and those corresponding to foreign banks (one of the main differences between them is the range of assets taken into account to classify the bank). Thus, banks will be classified into categories mainly based on their balance sheet of assets, but also considering other factors such as their international business or short-term financing in wholesale markets. Depending on their classification, requirements will be lower for institutions with less systemic risk. It is also worth mentioning that global systemically important banks will barely see any change.

In addition to this initiative, the agencies have proposed changes to other regulations. Perhaps the most striking is the proposed change to the Volcker rule (for which five different agencies collaborated). In this case, different categories of banks were also created, adapting the requirements to the size of their trading books.

It seems clear that the trend has changed in terms of U.S. financial regulation. The question that follows is how this will affect European banks. Is it possible that this trend will spread to other places? The first thing to note is that in general, the changes in the U.S. framework affect domestic and foreign banks in a similar manner (although with some nuances in the way the balance sheet of assets is calculated) so it will not create major competitive disparities in the U.S. market. Nevertheless, during discussions on these reforms, there was debate over a topic that could harm foreign banks and lead to greater fragmentation on a global scale: the possibility of imposing liquidity requirement on branches.  Regarding the second question, it does not seem likely that the EU will follow a similar path. However, it’s important to note that Randal Quarles (the Vice Chair for Supervision at the Fed) is also the President of the Financial Stability Board (FSB), the global body tasked with making recommendations for regulations. This means that over time, the regulatory recalibration process could transfer to other locations.

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