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German banks supervisor warns of new cycle of deregulation

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Via Financial Times

Germany’s most senior financial regulator has warned of the grave dangers to the “public good” if politicians loosen post-crisis rules to boost growth. 

The comments from BaFin President Felix Hufeld come as policymakers fine-tune capital rules against a backdrop of growing concern over Europe’s flagging economy and as banks struggle to cope with negative interest rates. 

“I’m of course afraid that we are pushed into a new cycle of downward regulation,” Mr Hufeld told an audience of bankers, policymakers and investors at the Institution of International Finance’s annual meeting in Washington. 

“Let’s not do that. A little bit of breathing room is fine. (but) it’s detrimental to everybody, both the industry as well as the public good, to do that (deregulate).” 

While US banks posted a resilient set of earnings last week, European rivals are being assailed by negative interest rates, including negative yields on parts of their massive sovereign debt portfolios, and slow growth even in traditionally strong economies such as Germany. 

“In many more times than not there are attempts from the political world to use or misuse financial regulation to promote all sorts of political purposes unrelated to risk,” Mr Hufeld said, adding that while no one was against supporting small businesses “ignoring financial risk is planting the seeds for the next financial crisis.” 

His comments came as Citigroup chairman John Dugan and Société Générale chief executive Frédéric Oudéa argued for a balance between regulation and the banks’ capacity to run their businesses.

Felix Hufeld, BaFin president, gestures while speaking during an interview in London, U.K., on Thursday, Feb. 2, 2017. Fintechs shouldn't have a special regulatory regime, Hufeld, head of the German bank regulator, said during the G20 Digitising Finance conference in January. Photographer: Luke MacGregor/Bloomberg
Felix Hufeld said politicians often misused financial regulations for reasons unrelated to risk © Bloomberg

“There’s a trade off,” Mr Dugan said. “You can go too far (with regulation), the returns can become quite diminished.” 

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“If you wanted to have a traffic system that had no accidents you’d make everybody drive around in tanks and drive three miles an hour . . . you’d definitely lower the number of accidents and deaths in the economy.”

Mr Oudea said European banks needed “urgent” clarity on the future of the bloc’s banking union, and how refinements to the Base III rules would be implemented.

Earlier in the week, Santander executive chair Ana Botin told the same event that her bank could make “billions of more loans” to the economy if European regulators overhauled the securisations market. She also called for changes to accounting rules so that European banks were able to capitalise their software investments as an asset in the same way that American rivals can. 

“If I can spend an extra $500m investing in digital, that’s going to benefit 140 million consumers and 5 million businesses,” she added. 

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