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Prudential Regulation in an Age of Protectionism
6 December 2016
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The Basel Committee on Banking Supervision (“BCBS”) is currently finalizing reforms to the regulatory capital standards for banks, including refinements to the Basel III standards, to address variability in risk-weighted assets. These proposed reforms, known as “Basel IV”, have been strongly opposed by the European Union, especially by the EU banking industry, for having the potential to increase the capital requirements of EU banks by as much as €860 billion. Authorities in the European Union have threatened to reject any reforms which significantly increase capital requirements, while the U.S. regulators have advocated sticking to the Basel IV reforms, as proposed.
The European Union has also recently published legislative proposals to implement certain reforms to the capital regime for banks, including a new requirement for certain third country banking groups with two or more institutions in the European Union to establish an EU-based and separately capitalized intermediate holding company. A similar requirement has been introduced in the United States since July 2016.
These developments could point towards increasing protectionism and the erection of barriers to cross-border trade in financial services. They also complicate group structure and capital planning, especially in the light of the Brexit vote and the election of a new administration in the United States.
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