European bankers

European bankers to politicians: Save us from the Americans

New post-crisis banking rules that work to the advantage of US rivals will wipe out European banks, they say.

By  Francesco Guerrera

It’s the day before D-Day for Europe’s bank lobby.

European banks are about to launch a last-ditch campaign to prevent regulatory changes that they believe will make them permanent also-rans to American competitors.

Their strategy? Enlist sympathetic European politicians to push back against U.S.-dominated global rule-making bodies.

After failing to persuade international financial regulators to soften tough new rules that will hamstring their lending and trading operations, the European banking industry will unleash a full-frontal lobbying assault on the corridors of power in Brussels, Frankfurt, London, and Paris in the next few months.

Banking executives and lobbyists say the argument to be made to finance ministers, premiers, and Commissioners will go something like this: Unless you change, amend, or delay the new regulatory framework, European banks will be annihilated by U.S. rivals — and the entire EU economy will suffer as a result.

U.S. banks and some regulators dismiss such claims as a desperate attempt by European banks to blame the referee for their losses on the field. But European banking executives will tell their political counterparts that the rules are stacked against them and that nothing less than the future of their domestic financial industry is at stake.

Time is running out. The influential Basel Committee on Banking Supervision — the primary global rule-maker for banks — has set a year-end deadline to complete so-called “Basel III,” the new, stricter regulations set in motion by the financial crisis of 2008 and aimed at steering the banking industry away from a similar disaster in the future.

Of course, U.S. banks will have to abide by “Basel III” like everybody else. But the Europeans counter that the U.S. has an outsize influence on the Basel Committee, partly because Europe is not represented by one voice but by a myriad voices of national regulators. As a result, the rules coming out of Basel tend to favor U.S. banks, they say.

Make a decision, quickly

Ironically, it fell to an American to spell out just how important the coming battle is for European banks. Jes Staley, who spent most of his career at J.P. Morgan Chase before becoming chief executive of the U.K.’s Barclays last year, didn’t mince his words when addressing a Brussels forum last month.

“European policymakers have a decision to make, and it is a decision that needs to be taken quickly,” he said. “That is, they must determine whether they care who owns, runs, and manages the capital markets intermediaries that we depend on. We are about to tip over into American dominance and if this trend continues, we risk a very near future in which Europe’s capital markets are almost entirely dependent on firms domiciled elsewhere.”

The numbers seem to back up Staley’s contention. In the first three months of 2016, American banks accounted for 57 percent of all investment banking revenues in Europe, according to research firm Coalition. Put another way, the likes of Goldman Sachs, J.P.Morgan, and Citigroup earned some $2 billion (€ 1.8 billion) more than EU rivals such as BNP Paribas, Barclays, and Deutsche Bank helping companies sell equity, debt, or advising takeover deals.

This is a stark reversal of the situation four years ago, when European banks commanded more than half of revenues on their home turf.

The figures are catnip for EU banking lobbyists. They argue that “Basel III” would exacerbate an already bad situation by raising capital requirements, crimping banks’ ability to lend, and favoring U.S banks that benefit from a strong position in their home market and more lenient regulators, in European banks’ view.

In fact, the EU banking sector hates the new rules so much that it has taken to calling them “Basel IV” — an allusion to seemingly endless rounds of punitive post-crisis regulatory measures.

So far, these protestations have fallen on deaf ears in Basel and in other financial capitals. Governor of the Bank of England Mark Carney, for example, has repeatedly chided banks for using “Basel IV.” Both he and the Basel Committee insist that there will be no “significant” increases in capital as a result of the new rules.

With their backs to the wall, European banks say they have no choice but to buttonhole politicians in the hope that they will see the error of Basel’s ways. And since the European Commission, European Parliament or national regulators will have to implement any rules coming from Basel, the banks plan to focus on those centers of power.

“We feel it is a political issue,” said Wim Mijs, chief executive of the European Banking Federation, in an interview. “This goes beyond technical. It is up to the EBF to translate the impact of any changes arising from Basel IV [for politicians].”

The tactic is already working in some countries.

On June 16, François Villeroy de Galhau, the governor of the Bank of France and member of the European Central Bank’s governing council, criticized the Basel Committee for reneging on its promise to not increase capital requirements. “The current technical proposals made by the Basel Committee do not appear to fully respect this pledge,” he said at a conference, according to Reuters.

The bank lobby hopes to achieve similar success in other EU countries. When they meet with power brokers, the banks’ representatives will come armed with “quantitative impact studies,” a detailed set of data that will show the effects of the new Basel rules on the European economy. A number of industry bodies are working on these and should be ready to present them by early next month, according to people involved in the discussions.

Fear as a weapon

But European banks and their lobbyists also know that a much more powerful weapon than spreadsheets is fear. They intend to deliver an implicit double threat to politicians.

Their one-two punch: “Go ahead with the rules, and you will never get the European economy back on track;” and “Do you really want European markets to be dominated by Americans?”

“We have to realize that, whether we like it or not, the European economy is still largely financed by banks,” the EBF’s Mijs elaborated on the first point. “Any outcome of the decisions of the Basel Committee will have significant repercussions on the European economy.”

Meanwhile, U.S. banks scoff at the second point. For a start, they maintain that neither their regulations nor their regulators are more lenient. On the contrary, U.S. bank executives argue that they withstood sharper pain shortly after the crisis in the form of tough legislation such as the Dodd-Frank Act, an enforcement crackdown that led to hefty fines, and “stress tests” that were much more stressful than the European ones.

EU banks, in the American view, are just lagging behind, struggling with inefficient business models, and only now coming to grips with the post-crisis task of cleaning-up their acts.

“They know that politicians won’t ask them about the details,” said a senior executive at a large U.S. banks. “It’s a narrative that plays well politically, although they are taking a bit of a risk they might be challenged on the facts.”

Perhaps more importantly, U.S. banks argue that they contribute to the European economy every bit as their domestic rivals. “What’s the difference?” asked another executive at a U.S. bank. “We are based in Europe, we employ people here, and we help European companies. Who cares where we are from?”

That will be a crucial issue for Europe’s political class as it decides whether to heed the pleas of EU banks. To ensure that and before hoisting the white flag in this decisive regulatory showdown, European banks plan to drape themselves in national flags.