Donald Trump, who has been in power for several weeks, is well on his way to pursuing deregulation of the financial sector.
With the European banking sector already losing ground to US banks, the gap is likely to widen as the EU implements Basel 4 standards in 2025.
These standards were published by the Basel Committee in December 2017 and transposed at European level through the Capital Requirement Regulations 3 (CRR3) and the Capital Requirements Directive 6 (CRD6).
CRR3 poses serious constraints for European banks by increasing capital requirements and risk-weighted assets.
Through this standard, the Basel Committee also aims for international harmonization among banks. European banks, which are fond of internal models that consume less equity, will replace them with standard models used by their American counterparts.
Among the constraints of the new credit risk regulation is the notion of “Output Floor”. This aims to reduce excessive variability in institutions’ own funds requirements calculated using internal models. It should improve the comparability of institutions’ capital ratios, restore the credibility of internal models and ensure a level playing field between institutions. In practice, the weighted assets calculated by banks on the basis of their internal models may not, in total, be less than 72,5% of the weighted assets calculated using standard approaches. Thus, the benefit a bank can derive from using its own models is limited to 27.5% of the weighted assets calculated using standard approaches. The Directive will be implemented on a transitional basis until 2030 to avoid sudden increases in capital requirements associated with certain asset classes.
Another novelty in CRR3 is the consideration of the crypto-asset market. The European Union had already taken the matter into its own hands with the introduction of a uniform legal framework in the form of the MiCA (Markets in Crypto-Assets) regulation adopted in May 2023. After several years of rapid growth in crypto-asset markets driven by a growing number of investors, CRR3 has decided to integrate crypto-assets into the banking prudential framework.
Since Donald Trump’s election, the price of bitcoin has soared. The 47th president of the United States recently indicated his intention to establish a strategic Federal Reserve of Bitcoin. He sees it as a way to strengthen the U.S. economy in the face of growing competition from China.
Financial institutions are thus exposed to increasing risks that can affect financial stability: mainly credit risk, but also counterparty, market and liquidity risk. The standards therefore aim to regulate and limit the risks associated with these exposures.
The European Union, as always in good shape, is therefore continuing to implement the banking package. CRR3 has even planned an assessment of the overall situation of the banking system in the EU by 31/12/2028.
Meanwhile, our neighbors are charting their way down less regulated paths…In the UK, the entire Basel III reform has been postponed until 2026. In the United States, plans were put on hold following the resignation in early January of Michael Barr, Vice Chairman of the US Federal Reserve Board responsible for banking supervision. Donald Trump now has a free hand to choose a successor closer to his ideas.
Column by Sophie Friot
