In this report, we assess the package released today by the European Commission principally to assess the manner in which this further fragments global financial regulation and the impact doing so will have for national regulation and competitiveness. We had anticipated this package in our report last week on U.S. global-finance policy (see Client Report REFORM131) as well as in reports going back to 2014 forecasting eventual Basel fragmentation. With fragmentation now upon us, U.S. banks increasingly at odds with pending Basel actions will have greater scope to persuade their regulators to go their own way, although several of the ways Trump appointees will go may well be considerably different than the way sought by larger U.S. banks and foreign companies doing business here (see Client Report CAPITAL214). The new EC package – which must be approved both by national legislatures and the European Parliament to take effect – is driven in large part by Brexit and the power this gives German and French regulators in the EU process. However, continuing U.S. actions contributed to the decision to ring-fence non-EU banks in a manner directly analogous to the FRB’s intermediate holding companies (see FSM Report FBO3). U.S. GSIBs will find ring-fencing particularly problematic because undermined efficiencies compound more stringent parent regulation to adversely affect competitiveness – perhaps another EC goal in this sweeping package. Importantly, the EC package covers systemic investment companies as well as banks. It also builds on a recent cumulative-impact review (see FSM Report COMPLEXITY2) to provide considerable relief for small companies.
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