Global banks are nearing peak regulation

Basel summit. Sixteen years ago last month, Jamie Dimon was summoned to Washington. re, Treasury Secretary Hank Paulson presented JPMorgan chief executive and heads of eight or large U.S. banks with a n-negotiable proposal: accept up to $250 billion in capital from federal government. move was part of an unprecedented and coordinated attempt to save global banking system from collapse. It also marked beginning of an overhaul of financial regulation that, a decade and a half later, is still t complete.

This week, though, Dimon declared he had had eugh of new bank rules. “It is time to fight back,” 68-year-old, only one of nine CEOs from 2008 still in same job, told American Bankers Association. “We don't want to get involved in litigation just to make a point, but if you're in a knife fight, you better bring a knife and that's where we are."

Dimon, whose bank is world’s largest with a market value of $630 billion, is t alone. Across developed world, bank executives are pushing to limit - and in some cases reverse - rules introduced since 2008. Though previous attempts to resist regulatory onslaught largely failed, re are good grounds for believing that banks are approaching peak regulation.

first reason is that recollections of crisis have faded. Banks are longer fragile beasts that would have toppled over in 2008 without taxpayer support. Lenders absorbed shock of Covid pandemic in 2020, and most large banks also emerged unharmed from market turmoil of March 2023, when several regional U.S. banks failed and Credit Suisse had to be rescued by its Swiss rival UBS.

Andrew Bailey, goverr of Bank of England, told an audience in Washington last week that memories of crises recede over time. “I can observe this happening with global financial crisis fifteen years or so on. I do get people telling me that ‘you have solved that one so we can relax’.”

second reason is that banks face intense competition from private credit providers and buyout firms. Much of this is by design: after 2008, regulators explicitly wanted to shift riskier activity to institutions where reckless behaviour would do less harm. Regulators are also shifting ir focus. BoE is subjecting 50 institutions to what it calls a system-wide exploratory scenario, where central bank asks m to simulate a shock to see how it ripples through markets.

third factor is that politicians who initially blamed banks for ecomic costs of crisis are w more sympatic to tion of a tradeoff between regulation and growth. Watchdogs in turn face accusations that ir rules are out of line with or jurisdictions. Swiss bankers have criticised government plans to impose tougher capital requirements on UBS because it could make industry less competitive. BoE plans to shrink period over which senior bankers must defer bonuses from eight years to five.

Meanwhile, banks have ramped up ir lobbying efforts. U.S. lenders spent much of last year arguing against a pack of rules kwn as “Basel Endgame”, which American regulators had adapted from global guidelines. y even created television ads urging Congress to act. pressure paid off: In September Michael Barr, Federal Reserve’s top bank cop, anunced a set of diluted proposals.

This is hardly a bonfire of regulation, though. Many watchdogs are still implementing new directives. In European Union and United Kingdom, final set of Basel rules is t due to take effect until 2026. Regulators are also busy enforcing compliance with new rules - and punishing firms that fall short.

Yet global regulatory edifice remains fragile. U.S. watchdogs have yet to agree on a common approach to Basel. U.S. Federal Deposit Insurance Corporation is resisting Federal Reserve’s watered-down proposals, Reuters reported in September, citing three people with kwledge of matter. standoff looks set to drag beyond next week’s presidential election. If former President Donald Trump returns to White House, regulators he installs could dilute proposals furr - or even ditch Basel framework altoger.

This prospect alarms rule-setters. “An open global financial system requires global prudential standards,” Erik déen, goverr of Sweden’s Riksbank and chair of Basel Committee on Banking Supervision, warned in Washington. “Failure on this count could result in regulatory fragmentation, regulatory arbitr and a potential ‘race to bottom’ leading to a dilution of banks' resilience.”

Policymakers have good reasons to be concerned. While volatility in markets remains relatively low, this is at odds with unpredictable direction of inflation and interest rates, International Monetary Fund points out in its latest Global Financial Stability Report. Increased geopolitical risks could also produce financial shocks. Given se uncertainties, banks arguably need even bigger buffers.

Some parts of post-2008 overhaul also remain unfinished. Despite extensive efforts to design tools for safely winding down failing banks, Swiss regulators balked at using ir powers to tackle Credit Suisse. Last year’s crises also revealed new vulnerabilities in banking: depositors yanked online funds from Silicon Valley Bank in a matter of hours.

Most big lenders do t want to dismantle post-crisis regulatory infrastructure. Roughly equivalent global rules make it easier for international banks to operate across borders. Besides, tower of regulation constructed since 2008 is an effective barrier to upstart fintech firms hoping to disrupt banking industry.

Even so, policymakers should heed lessons learned by ir predecessors in 2008. Klaas Kt, president of Dutch central bank and head of Financial Stability Board, recently reminded an audience in Washington that financial stability is foundation of government policy. “If financial stability is gone, as a government you can forget about or policy priorities. You will spend most of your time drawing up rescue plans for an ecomy in free fall.”