After the financial crisis of 2008, the US regulators moved quickly to force banks under their regulation to improve their capital ratios whilst European regulators took a much softer approach. There is some evidence that the focus on strong capital in the US allowed the US banks to more quickly return to lending supporting the real economy. European banks and politicians had pushed for a softer approach but that did not lead to strong banking support for the economy.
With COVID-19 now impacting banks, it is interesting to see the reaction on both sides of the pond – nearly the opposite of the prior experience. As noted in the Financial Times on 28 July, the European Central Bank has clearly told banks under their supervision to continue to build capital in part through dividend restrictions. But in the US the regulators and banks have been using emergency legislation to support the economy during the impact of COVID-19 to loosen the tighter restrictions that came about in 2008. The New York Times noted that the Senate Banking Committee is seeking to include regulatory relief under pressure from both the regulators and the large banks.
I wonder why the strong results from an earlier focus on healthy capital is not being considered in this change? Will these changes turn the tables on the relative strength of US and European banks?
