The objectives of transatlantic financial services regulation and the future of international cooperation
Much has been written in recent weeks about heightened geopolitical tensions and the impact of policy changes concerning international trade on global markets. Less has been said about the growing shift in focus on both sides of the Atlantic—and across the English Channel—on the next stage of development for financial services regulation. With recent leadership changes in both the United Kingdom (UK) and the United States, along with a newly constituted European Commission and European Parliament, the contours of policy towards banks and non-bank financial institutions are becoming ever clearer, with implications for economic growth, development, and stability in particularly volatile times.
Factors will depend, however, on evolving political circumstances coupled with the effects of a continuing shift toward more fragmented policy making across borders. This issue has long been on the minds of government and industry alike, but it may become more complicated in the near to medium term. It is timely to examine these trends to better understand the direction of travel between the UK, European Union (EU), and United States, and how this will impact markets and economies globally.
First, in the UK, the government’s Financial Services Growth and Competitiveness Strategy will be published this July. It will focus on five priority growth opportunities—sustainable finance, asset management, fintech, insurance, and capital markets. The Prudential Regulation Authority and the Financial Conduct Authority will be at pains to continue emphasizing that the primary objectives of consumer protection and systemic stability will not be compromised through any changes. However, it will be important to reflect on how issues such as the Basel III Endgame implementation will be addressed in light of these priorities, considering the approach of other jurisdictions (especially the United States) to the future of this global prudential package.
Second, in the EU, the European Commission has similarly affirmed that it will increasingly focus on growing financial market activity and ensuring the bloc can adequately compete with other world actors in financial services. This will likely lead to further discussions on, inter alia, sustainability standards, financial risk rules, and closer market integration. Though there is consensus on the need to make the EU more competitive, concerns have already been raised, for example, by Frank Elderson, vice-chair of the European Central Bank supervisory board that increasing competitiveness should not be pretext for watering down regulation and potentially increasing instability.
Further complicating matters is the issue of how, or if, the bloc will respond to any escalation of punitory trade measures by the US administration. Though the pace of recent trade talks has accelerated, questions remain in the near term about the potential application of the EU Anti-Coercion Instrument if negotiations fail, and what that may mean for the imposition of restrictions on financial services activity from third countries.
Third, in the United States, a more complex picture is emerging. The economic implications of White House trade policy will have to be weighed against the general deregulatory bent of the administration, but a few themes have come to light. There is a clear indication that the US Treasury will play a greater role in financial services regulation. Treasury Secretary Scott Bessent is on record stating that lending policies should better match the risk of financial firms, and that bank regulation has not taken economic growth into account. Federal banking agency rulemaking will also likely shift. Federal Reserve (Fed) vice chair for supervision, Governor Michelle Bowman, has indicated that supervisory reform, the promotion of innovation, and a pragmatic approach to regulation will be prioritized. The objective of cost-benefit analysis being applied toward regulation will affect how the Fed addresses the outstanding issue of the Basel III Endgame implementation, alongside an expected review of the supplementary leverage ratio and its impact on the US Treasury market.
Lastly, how the United States approaches international regulatory initiatives is also expected to be gauged by how they align with updated US regulatory policy objectives and the America First approach of the administration. SEC Commissioner Hester Peirce recently questioned the agendas of the international standard setters in light of calls for increased domestic control over policy. Secretary Bessent has also raised the issue of US reliance on these bodies. Such interventions will be important to monitor considering the wider gap between national and international rhetoric on cooperation geopolitically.
This is certainly a non-exhaustive snapshot of trends across three major economies, but it raises the question of where the rest of the world stands. How will international cooperation on financial stability evolve with this more domestic-minded focus on growth and competitiveness? This question is coupled with potential disputes on international trade in goods spilling into reciprocal action against the services sector.
On the first point, cooperation will likely continue around topics of consistent mutual concern at the Basel Committee, the Financial Stability Board, the Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions. Areas of focus will include oversight of the non-bank financial institution sector, modernizing cross-border payments, and addressing issues for operational resilience and cyber security. In his April letter to the Group of Twenty finance ministers and central bank governors, outgoing Financial Stability Board Chair Klaas Knot emphasized the importance of vigilance and international cooperation to address emerging risks and ensure the continued resilience of the financial system. Bilateral and multilateral regulatory collaboration is also continuing in the crypto currency space. The United States and the UK, in particular, are working together to support the responsible growth of digital assets.
However, the prospect is significant for increased fragmentation in regulatory approaches to capital, liquidity, and financial risks related to climate, among other issues. Cross-border financial institutions will potentially have to navigate a much more complicated and disparate set of requirements, which ultimately may impact systemic safety and soundness.
On the second point, the Bank for International Settlements recently warned that geopolitical tensions between countries reduce cross-border bank lending between them. The specter of retaliatory responses in reaction to punitive trade policies seeping into the regulation of financial services can exacerbate this concern. This is particularly acute in the regulation and supervision of foreign banks. Trapping capital and liquidity can have a specific negative impact on the provision of domestic financial services products, hurting the very objectives of growth and competitiveness that appear the ubiquitous watchwords of national policymakers.
There is still a strong case to be made for an interconnected global financial services system where regulatory authorities collaborate on the best means to ensure stability and security across borders. Doing so is not mutually exclusive with objectives for increased domestic growth and competitiveness. It can, in the case of cross-border capital flows, contribute to achieving those goals. An important area of reflection for both the public and private sectors in the coming months is how cooperation can be activated to prioritize economic development while maintaining stability with consistent global standards.
Matthew L. Ekberg is a contributor at the Atlantic Council and former Senior Advisor and Head of the London Office for the Institute of International Finance (IIF).
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Image: Europe seen from space, combined with different financial charts. Perfectly usable for topics like global stock markets or the European economy. Highly detailed image, textures courtesy by NASA: https://visibleearth.nasa.gov/images/55167/earths-city-lights, https://visibleearth.nasa.gov/images/73934/topography, https://visibleearth.nasa.gov/images/57747/blue-marble-clouds/77558l