BRUSSELS — In a city where even the curve of a banana can spark rulemaking, the mere whisper of “deregulation” has long posed an existential quandary.
But shifting political tides across the Atlantic may finally force Brussels to confront this taboo.
Thanks in no small part to the election of Donald Trump, those yearning to rewrite — or torch — the financial rulebooks now have an excuse to reframe the debate. Just don’t call it deregulation. The preferred European euphemism is “competitiveness.”
With Trump reportedly considering shrinking, merging, or removing banking regulators in the U.S. altogether, and ally Elon Musk calling for the elimination of the Consumer Financial Protection Bureau (CFPB) as part of sweeping government cuts, the stage is set for a frenzy of deregulation on Wall Street — if not beyond.
In November, many were caught off guard when European Commission President Ursula von der Leyen signaled a similar gear shift for Europe with her red-tape-slashing agenda for her second five-year term.
European institutions now have little choice but to pay close attention.
The head of the French central bank, François Villeroy de Galhau, warned in November that “a wind of deregulation” was blowing from across the Atlantic, cautioning that it could reshape the global regulatory landscape.
Wim Mijs, head of EU banking lobby the European Banking Federation, told POLITICO that EU banks were alert to Trump’s “aggressive deregulation agenda” and his potential distancing of America from multilateral institutions where global finance rules are agreed.
Yet in Europe it’s competitiveness, not deregulation, that has become the catch-all term for such responses, thanks in large part to the publication of two landmark reports this year by former Italian prime ministers Enrico Letta and Mario Draghi.
Responding to President Joe Biden’s massive spending programs — dubbed Bidenomics — both reports called for a radical shakeup in how Europe’s financial markets operate to better compete with the United States and China.
Trump’s renewed push for deregulation has only added substance to their findings, putting further pressure on Europe to adapt or risk falling behind.
Between a rock and a hard place
All of this poses an awkward conundrum for the bloc’s financial regulators, none of whom wish to be held responsible for another financial crisis, but who risk looking out of touch amid the industry-pleasing push for lighter regulations.
On one hand, loosening rules could help Europe stay competitive; on the other it risks undermining safeguards meant to prevent another financial crisis.
The EU’s new finance commissioner, Maria Luís Albuquerque, highlighted the dilemma when she revealed during her confirmation hearing that she doesn’t “like the word deregulation.”
“[The finance sector] needs regulation because of the consequences when it fails,” Albuquerque said. But she appealed to both sides, saying the EU needs to “put the brakes on legislation temporarily” and to think carefully about how to make future legislation more fit for purpose.
Thus far, despite the eagerness of industry, Albuquerque has proved more regulatorily hawkish than hoped. In political negotiations she has criticized the dilution of new rules to the point they no longer deliver on the goals of original proposals.
Hence, some say, the appeal of the “competitiveness” moniker: It’s direct enough to be impactful, but vague enough to be plausibly deniable.
“The beauty of a political buzzword is that it is used in every political speech without attaching any meaning,” Mijs said, adding that often “nobody knows [what meaning is intended], but it feels good.”
Those worried about a deregulation cycle triggering a destabilizing race to the bottom should look to the bigger picture, finance executives say.
Many have quietly worried for some time about the complexity of the EU regulatory environment. Frédéric de Courtois, deputy CEO of French insurer AXA and president of the EU insurance lobby, told POLITICO that complexity stood to make the bloc “too risk-averse, too cautious.”
“I’m not saying that we should compete with the U.S. on deregulation. I’m saying that we are not isolated and that we need to have good regulation that doesn’t impact negatively our competitiveness,” de Courtois said.
To his mind, Trump’s return could be a positive trigger if it encourages Europe to change.
“We just need to stop regulating,” he said.
Be careful what you wish for
For Mijs, regulatory simplification of this kind is urgently needed to make finance rules more workable. “[In the EU] we die by beautiful intentions because we start with something that is simplifying and it’s good,” he said. “At the end of the process, we have built something that is like a spaghetti of rules that is incomprehensible.”
Regulatory fatigue is also top of mind. In total, about 50 new financial services laws have been passed in the last five years, many of these being positioned for secondary rulemaking in the years to come.
For instance, the latest rules on the use of outside IT providers by finance firms have the industry bracing for a deluge of follow-up technical rules, legitimizing industry claims that compliance will hinder corporate investment.
Sandro Pierri, CEO of BNP Paribas’ asset management wing, said for asset managers, who are bound by fiduciary duty — a commitment to provide the best returns for their clients — the current regulatory burden obliges them to invest elsewhere whether they like it or not.
“Our job is to simply make sure that we deploy the capital in the best possible way for the clients. … It’s a policy job to create the conditions for us to allocate more to Europe,” he said.
EU countries have also been calling on the Commission to slash red tape. In October, France, Germany and Italy co-wrote a letter asking for a pause on finance rules, saying the EU should “shift gears and regain its capacity to compete in the global arena” and “put stronger emphasis on the competitiveness of the financial sector, particularly banking.”
To the surprise of many — especially those who drafted the original legal texts now on the chopping block — finance executives may be about to get what they want.
Since coming out in favor of simplification in November, von der Leyen has announced a plan to consolidate three of the EU’s flagship environmental disclosure laws in a sweeping legal text scheduled to be published in February.
The Basel dilemma
And yet, regulators are not the only ones who are worried about putting the profitability of the finance sector ahead of its safety.
Thierry Philipponnat, chief economist at the NGO Finance Watch, said the “competitiveness” agenda was increasingly being used as an excuse to avoid completing the crucial work necessary to prevent another financial crisis.
“Recent moves to delay and dilute vital regulatory protections reflect a worrying trend where ‘competitiveness’ is repeatedly used as a pretext to weaken essential safeguards against financial risks,” he said.
This applies especially to global banking rules known as the Basel 3 standards. While the EU, U.K. and other countries have enacted the global rules in national legislation, the U.S. has delayed doing so following massive lobbying from the banking industry.
Now, with Trump returning to the White House in a matter of weeks, the future of the rules looks uncertain — which creates a dilemma for the EU. Should the bloc push ahead with Basel 3 for the sake of banking stability and risk giving U.S. banks a competitive edge in the process? Or should it change direction and contribute to a broader weakening of standards?
In a sign that regulators may be looking to stay the course, the EU and U.K. have hinted at a coordinated response if the proposals are ripped apart in the U.S.
Villeroy de Galhau, speaking in Paris in November, called for a compromise that would simplify EU rules without necessarily upending global standards, explaining that “simplifying does not mean deregulating.”
The Commission’s job will be “to find the fine line between a race to the bottom and the objective to stay competitive,” said AXA’s de Courtois.
The industry, as a whole, is not opposed to such an outcome. No matter how onerous the EU’s suite of incoming rules may be — from the Basel package to clearing updates to cyber rules for finance — industry more often than not prefers certainty over uncertainty. In this case, compliance with well-forecast rules is preferable to the limbo of new rules being torn up and renegotiated.
One thing everyone can be sure of is that even if things end up getting substantially watered down, nobody will be keen to call the move deregulation.
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