For a few years now it looked as if the world was moving to stricter and stricter banking regulations. Following the economic crisis, governments and central banks tool steps to mitigate potential risks by introducing additional restrictions on large banks.
Regulators have demanded that the world’s leading global banks will maintain more capital and to finance more of their lending from equity instead of debt. Why? Because this means that bank losses are less risky. Lenders were also subjected to regular stress tests.
Now though, things are changing.
President Donald Trump has been very outspoken about his commitment to make reforms to the financial regulations passed by President Obama following the 2008 crisis. Meanwhile, UK Prime Minister Theresa May faces potential ‘punitive’ trade steps from the EU. In response, she stated she will soften regulations to tempt banking companies to stay in London following the Brexit. Even in Brussels, leading European regulators are moving towards softer international banking standards.
Some regulators, including Mark Carney, have already pointed out the risks of so-called ‘reform fatigue’, resulting in some policies being abandoned before they’re completed. Many argue on what should happened next, whether or not current regulation is actually effective and if it’s so strict that it limits growth.
The real question is whether we will now see ‘regulatory arbitrage’ as different countries make their own rules and how it will affect the global banking system.
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