In reality, the facade of unity hides significant disagreement among regulators. Some argue that the current rules promise “graveyard stability” – a system that is stable only because nothing moves in it. Others warn that any relaxation risks a repeat of the 2007-2009 financial crisis.
However, views are changing, and not just in the United States. For example, former European Central Bank President Mario Draghi ‘s report on EU competitiveness in 2024 suggested that banking regulation may now be holding back development. In the United Kingdom, regulators have been instructed to take competitiveness and growth factors into account when making decisions. Prime Minister Keir Starmer has even asked them to submit proposals to stimulate growth, which is like asking a lawyer to write a love letter.
But what do these changes mean in practice? Will US, UK and EU policymakers eventually arrive at an approach that they believe is compatible with Basel?
Over the past few weeks, we have gotten a rare glimpse into the internal disputes that central banks usually keep behind closed doors. After Michelle Bowman, the U.S. Federal Reserve’s new vice chair for banking supervision, laid out her approach to regulation, her predecessor, who still sits on the Board of Governors, quickly disagreed. Fed officials can feel uncomfortable voicing their disagreements so publicly, but in this case the transparency proved instructive.
Bowman was particularly succinct. Her approach, she explained, “is not to narrow our focus, but to sharpen it.” By “sharpening,” she means reducing supervisory staff by 30 percent, increasing the board’s reliance on state-level supervision, drastically reducing enforcement, and excluding many community banks from the Basel system altogether.
Michael Barr, Bowman’s predecessor, was predictably critical, pointing out that past periods of relative calm had often led to a weakening of supervision, with “dire consequences.” He also argued that the Fed’s supervisory rating system has been softened in ways that “diminish its strength and credibility,” creating a kind of regulatory “grade inflation” that makes banks look healthier than they really are. The consequences of this, he says, will become apparent when the next crisis hits.
Barr, alas, is on his way out, while Bowman’s view is becoming increasingly popular. In another signal of the Fed’s changing stance, Trump-appointed Governor Stephen Miran – known as the architect of the failed Mar-a-Lago agreement, which sought to boost U.S. exports by weakening the dollar – also supports lowering capital requirements for banks.
Miran favors lower capital requirements because of monetary policy rather than regulatory concerns. He argues that the size of the Fed’s balance sheet is bloated because of regulation that drives credit creation into the shadows, and that market forces, not regulatory arbitrage, should determine how and where credit is created. He has openly criticized the additional leverage ratio, which is already scheduled to be eliminated.
Strikingly, Miran also questioned the capital surcharge on global systemically important banks (G-SIBs) imposed by the Financial Stability Board and long ago adopted by the Fed. Repealing the surcharge would represent a major regulatory shift, given that it is the Fed’s primary policy tool.
It is impossible to say at this point whether such a waiver would result in a new regime in the U.S. that would ultimately be incompatible with Basel III. Global supervisors are adept at framing departures from international standards as minor deviations when expediency requires it. But this flexibility tends to be for short-term deviations, rather than approving a deliberate turn in the opposite direction.
Before leaving the Fed chairmanship, Klaas Knot, considered by many to be the successor to European Central Bank President Christine Lagarde, issued a stern warning to U.S. banks that oppose the Basel III reforms, the so-called “Basel endgame.” If Basel III breaks up, he said, regulatory equivalence could disintegrate along with it. Such an outcome, Knott said, would ultimately hit U.S. banks, which would “no longer be able to capitalize on open and mutually accessible markets.” It couldn’t be clearer: undermining Basel would come at a high cost.
Whether this warning will be heeded remains to be seen. Now that the battle lines have been drawn, the coming political confrontation will show whether U.S. policymakers still value prudence over politics.
Howard Davies,
former deputy governor of the Bank of England, is a professor at Sciences Po.
© Project Syndicate, 2025.
www.project-syndicate.org
