Why New York May Be a Big Winner in Brexit

TL;DR

Brexit may favor New York over European financial centers.

Transcript

a lot of conversation there with seinan there off C General about the need for a Level Playing Field on regulation between the US and Europe Basel and other International bodies have been trying to move towards that for some time is that under threat now with Trump in the White House well it's great to be here with you Anna thank you for having me ... Read More

Key Insights

• Trump's preference for bilateral trade deals threatens multilateral arrangements like Basel, impacting international regulatory cooperation.
• European banks are less capitalized than U.S. banks, which impacts their ability to create credit and support the economy.
• Regulatory asymmetry between the U.S. and Europe could lead to regulatory arbitrage, potentially benefiting New York post-Brexit.
• The potential repeal of Dodd-Frank may not significantly boost the U.S. economy but could increase bank profitability.
• European banks, especially in Italy and Germany, face capital challenges, while French banks are relatively better positioned.
• A repeal of Dodd-Frank might allow U.S. banks to achieve higher returns on equity, similar to pre-crisis levels.
• The long-term risk of deregulation could lead to banks over-leveraging, increasing the potential for future financial crises.
• The transatlantic regulatory divide could influence the financial landscape, with implications for the UK's position post-Brexit.

Questions & Answers

Q: How does Trump's policy affect international regulatory cooperation?

Trump's preference for bilateral trade deals undermines multilateral arrangements like Basel, which aim to harmonize international regulatory standards. His America-first approach could disrupt efforts to create a level playing field in global financial regulation, potentially leading to increased regulatory divergence between the U.S. and Europe.

Q: Why are European banks at a disadvantage compared to U.S. banks?

European banks are less capitalized than their U.S. counterparts due to a piecemeal recapitalization approach post-financial crisis. This weak capital position limits their ability to create credit, which is crucial for supporting economic growth. In contrast, U.S. banks underwent significant recapitalization, strengthening their financial position.

Q: What is regulatory arbitrage, and how might it benefit New York post-Brexit?

Regulatory arbitrage involves exploiting differences in regulatory standards between jurisdictions to gain a competitive advantage. With the U.S. potentially deregulating financial services and Europe tightening regulations, financial institutions might shift operations to New York to benefit from a more favorable regulatory environment, especially post-Brexit.

Q: What are the potential impacts of repealing Dodd-Frank on the U.S. economy?

Repealing Dodd-Frank may not significantly boost the U.S. economy as healthy businesses generally have access to loans. However, it could marginally ease credit conditions for borderline businesses. The primary impact would be on bank profitability, allowing them to achieve higher returns on equity, reminiscent of pre-crisis levels.

Q: How do capital challenges differ among European banks?

European banks, particularly in Italy and Germany, face significant capital challenges due to underrecognized non-performing loans and insufficient recapitalization efforts. In contrast, French banks are relatively better positioned, having managed their capital more effectively post-crisis, though they still face challenges compared to U.S. banks.

Q: What are the risks of increased bank profitability due to deregulation?

While increased profitability is beneficial for banks, it poses long-term risks if it leads to over-leveraging. Higher returns on equity might encourage banks to take on excessive risk, potentially destabilizing the financial system and increasing the likelihood of future financial crises, as seen in the 2008 crisis.

Q: How might the transatlantic regulatory divide affect the UK's financial position post-Brexit?

The regulatory divide between the U.S. and Europe could influence the UK's financial landscape post-Brexit. As the UK navigates its regulatory framework, it may have to balance between aligning with European standards or adopting a more U.S.-centric approach, impacting its attractiveness as a financial center.

Q: What are the potential long-term consequences of Trump's regulatory policies?

Trump's regulatory policies, favoring deregulation and bilateralism, could lead to a fragmented global regulatory environment. This might increase systemic risks, as financial institutions exploit regulatory gaps. Over time, such divergence could undermine financial stability, potentially leading to crises if unchecked, impacting global economic health.

Summary & Key Takeaways

• The discussion centers on how President Trump's policies, particularly his preference for bilateral trade deals, threaten multilateral regulatory efforts like Basel. This could widen the regulatory gap between the U.S. and Europe, with implications for global banking dynamics.

• European banks are struggling with capitalization issues compared to their U.S. counterparts, affecting their ability to provide credit and support economic growth. This disparity might lead to regulatory arbitrage, with New York potentially emerging as a post-Brexit financial hub.

• The potential repeal of Dodd-Frank is seen as a mixed bag. While it could improve bank profitability by allowing higher returns on equity, there are concerns about long-term financial stability if banks over-leverage, possibly sowing the seeds for future crises.