Confirming the regulatory race to the bottom, the EU says it will match least restrictive regulation

As if further evidence was needed for why the financial system should not be dependent on its regulators for insuring stability, Bloomberg reports that the EU is ready to match least restrictive financial regulations adopted by any other country.

The statement was specifically made about bank capital ratio requirements, but is indicative of the mindset  across all financial regulation.

Banks (SX7P) in the European Union may win a partial reprieve from Basel capital and liquidity rules if lenders in other regions such as the U.S. are allowed to escape the full force of the measures.

EU lawmakers are weighing safeguards to prevent lenders in the region from being left at a competitive disadvantage when a global accord by the Basel Committee on Banking Supervision is implemented, according to a document obtained by Bloomberg News....

The European Banking Authority and the European Commission, the 27-nation region’s executive arm, should be empowered to “take appropriate measures in order to adjust to the level of global competition,” according to the document by Othmar Karas, the lawmaker guiding the adoption of the law through the European Parliament. 

The Basel committee said on April 3 that the U.S. and China are among eight nations lagging behind in their implementation of its rules. The U.S. still hasn’t fully put in place an earlier round of changes agreed on by the Basel group in 2004.

The London-based EBA should “regularly assess” how well other nations apply the requirements, Karas proposed in the document. 

The report “strongly indicates that there is a lack of confidence that all regimes will ultimately commit to internationally agreed rules if these are seen to conflict with domestic priorities or individual national characteristics,” Richard Reid, research director for the International Centre for Financial Regulation in London, said in an e-mail. 

The proposals are “yet another sign of how difficult it is going to be in practice to get a uniform global implementation of rules on banks’ capital and liquidity,” Reid said.

Capital and liquidity standards are subject to being undermined by the "competitive disadvantage' argument.  Ultra transparency is not.

In fact, adoption of ultra transparency puts every country and bank that does not adopt ultra transparency at a disadvantage.  Adopting ultra transparency is a sign that the banks in the country can stand on their own two feet.

As a result, they should pay less to raise everything from deposits to unsecured debt to equity.  A lower cost of funds should translate directly into higher profits.

Bottom line:  ultra transparency results in a regulatory race to the top as regulators scramble to protect their banks by adopting ultra transparency.