The EU’s push to deregulate banks

0:02Good morning from the Financial Times. Today is Wednesday, July 15th. And this is your FT News briefing. British teenagers might be facing a social media curfew, and U.S. inflation actually cooled down last month. Plus, Brussels wants to loosen regulations so that EU banks can catch up to overseas competitors. But at what cost? Opponents of these changes argue we should be really, really careful about undoing a framework which has helped us withstand shocks from the growth financial crisis. I'm Mark Filippino, and here's the news you need to start your day.

0:43UK ministers are unveiling new rules today that would put a midnight curfew on teen social media use. That means anyone under the age of 18 would have to stop using platforms like Snapchat, TikTok, and YouTube after that time. The rules would also put mandatory time limits on the use of AI and put restrictions on chatbots that offer mental health advice for anyone under 18. Now, this isn't the only social media restriction the UK is pursuing. Last month, the government unveiled a full ban of social media for anyone under 16. Ministers have clashed with big tech platforms over these plans. Executives at the US groups argue that young people will also be restricted from valuable resources for learning and communication with friends and family.

1:26The first set of regulations will be submitted to Parliament by the end of this year. The ban on social media for anyone under 16 is expected to be introduced next spring.

1:42We got a better sense yesterday of how the Federal Reserve might tackle U.S. inflation. Data showed that the Consumer Price Index fell in June after several months of sharp increases. Last month, it hit a rate of 3.5%. That's lower than expected, and it means that the Fed is now under less pressure to raise interest rates. But will that good news last? Here to discuss is Myles McCormick, the FT's U.S. economics correspondent. Hi, Myles. Hey, Mark. So what did we learn from the latest inflation numbers? So we learned that inflation, as you say, after rising for several months, ticked down in June, and it ticked down by a good bit more than investors were anticipating.

2:22And the big driver was the fact that oil and petrol prices, which had been climbing for a lot of this year, driven by the war in the Middle East, had declined in June. So that fed through to the overall inflation picture and caused overall inflation to drop. But importantly, on top of that, core inflation, which strips out volatile food and energy prices, also fell, which signals that the kind of underlying level of inflation in the economy is also coming down. And that's a key signal for policymakers. acres. Yeah, let's talk about that, because a lot of what we've seen in inflation over the past couple of months has been driven by the war in Iran, right?

3:07So given that things are starting to tick back up this week, what does that mean for American inflation? Yeah, well, that's kind of the interesting thing about this report is that in a lot of ways, it's backward looking. I mean, we're talking about what inflation did in June when oil and petrol prices did come down. But But oil has spiked again this week as a result of tensions rising again in the Middle East. And that means that then when we look at July figures, we could have a jump again. So it just kind of goes to show how volatile the overall inflation picture is at the moment because of how volatile the situation in the Middle East is.

3:44Now, as luck would have it, new Fed chair Kevin Warsh delivered his first report to Congress yesterday, the same day that we got this CPI report. What did he say about it? So his big thing was that the Fed shouldn't declare a victory on the basis of one positive report that shows inflation ticking down. I don't want to overread or cherry pick data. He kind of doubled down on his very hawkish stance that the Fed was going to pull out all the stops in order to tackle inflation. There might be some that look at this morning's data and say, oh, mission accomplished. Everything is swell. That is not my view.

4:26So a lot of strong language from him that we shouldn't necessarily dwell too much on one data point and that the Fed is willing to kind of pull out all the stops as we look forward to tackle inflation trade this year and beyond. This is interesting to me, Miles, because Kevin Warsh came out in his first meeting as Fed chair and basically said that he wasn't going to give forward guidance. He was going to communicate less to the markets. And here he is saying, no, we're going to battle inflation by potentially keeping interest rates higher for longer. What sense did you get from watching this? Yeah, it's kind of funny, isn't it?

5:03I mean, I think from Warsh's point of view, what he's hoping is that if he can be loud enough about the Fed's intent to tackle inflation, it might put off the Fed actually having to do anything to tackle inflation, if that makes sense. Psychological monetary policy. 100%, 100%. Yeah, since a lot of times the market acts based on what it thinks the Fed is going to do just as much as what the Fed actually does. Like if he can convince investors that the Fed is very, very, very serious about tackling inflation, the Fed might not actually have to raise rates to do that in the near term. And indeed, I mean, bets on a July interest rate hike were all but eviscerated in the wake of yesterday's data.

5:48and Warsh's comments. Miles McCormick is the FT's U.S. economics correspondent. Thanks so much, Miles. Thanks, Mark.

6:01Wall Street banks smashed records last quarter. JPMorgan, Goldman Sachs, Citigroup, and Bank of America reported earnings yesterday, and they had a combined$19.3 billion in revenue from equities trading. It's way more than analysts expected, and it's 72 % higher than this time last year. The banks are cashing in on the AI trading frenzy and the blockbuster listing of SpaceX last month didn't hurt either. That IPO alone was a big moneymaker. It generated half a billion dollars worth of fees across Wall Street.

6:41And in the name of catching up to Wall Street, the European Union wants to loosen capital requirements for some lenders in the bloc. That move follows in the footsteps of the U.S. and the U.K. Here to discuss is the FT's Paula Tama. She covers the EU economy and financial regulation. Hi, Paula. Hi, thanks for having me. Good to have you. So what is Brussels considering for European banks? There's a number of proposals, but the most consequential one of them is to actually get rid of one of the discretionary layers of capital requirements that supervisors can impose on lenders if they believe that other safeguards do not sufficiently capture a bank's risks.

7:19And capital requirements are the minimum amount of a bank's own money that it must hold to absorb losses and protect depositors. And this specific capital requirement is pillar to leverage ratio. Removing it would reduce the amount of capital that some banks have to hold, potentially freeing up billions for lending, but also reducing supervisors' tools for making banks more resilient. Is there anything else that they're considering here? One proposal is they're evaluating whether to reduce the number of banks that have to be fully Basel compliant. So these are international banking standards that were agreed following the global financial crisis.

7:55And the EU has always been the outlier in that it applies Basel to all its lenders across the board, whereas the US and UK currently apply to a subset of those that are systemically important. And so Brussels is going to review whether its approach is too cumbersome for small and non-complex banks. And therefore, it should kind of break out a number of banks that have to follow Basel's and other that may not have to follow it in full or would have a separate regime. Now, we should mention that the European Commission did not respond to a request for comment and that, you know, the draft report is still subject to change.

8:30But Paola, tell me a little bit more about the why behind all this. Why is Brussels deciding to make these changes? Well, this is the first big comprehensive review of EU banking regulations following the global financial crisis that goes into the direction of loosening them rather than tightening them. And that's because there is a sense that EU lenders are incompetent enough compared to US or UK banks. And industry argues that it's a question of risk aversion from the EU and that regulations are always applied to their furthest possible extreme. And that's not the case in other jurisdictions, and therefore they lose out.

9:08Got it. So basically, if they want to keep up with international competitors like the U.S. and U.K. banking sectors, they need to loosen regulation. Yes, that's the main sense. But opponents of these changes argue that it's a question of scale, that U-banks are not sufficiently big, that there's a lot of reluctance to mergers across borders or even within countries. and that is the way to go for more banking competitiveness. There's obviously going to be a huge debate, both within the Commission itself, ahead of presenting legal proposals next year on all of these changes, and then following that in the European Parliament and across EU member states, with some already saying, like Finland, that it's a bad idea, we should not be loosening the regulations that we put into place after the global financial crisis because that's what makes our banks resilient and safe.

9:58Yeah, tell me, Paolo, What are some of the negative consequences that could happen? And is the EU prepared to face them? Yes, the European Commission has been saying that perhaps we have been way too risk avoidant and that there are benefits from introducing a level of controlled risk into the system. And that means perhaps taking on more lending, enabling banks to do more lending. And if that requires a good deep look at whether financial regulation and things like capital requirements are too tight, then so be it. That said, there is also the opposite view that, for instance, the crisis in Silicon Valley banks and then the collapse of Swiss banks has completely spared Eurozone and European Union banks.

10:44And that's for a reason. The opponents of these changes argue that's because EU banks are more tightly regulated. And so we should be really, really careful about undoing a framework which has helped us withstand shocks from the global financial crisis. Paola Tama is the FT's EU correspondent. Thanks so much, Paola. Thank you.

11:05You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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