Tying hands and cutting ties: Explaining the divergence between the EU and the US in global banking reform since the crisis

In the implementation of banking regulations stemming from the Basel Committee, the EU and the United States have diverged sharply in the ways they have chosen to implement. In a significant break with past trends, the EU has shaped and re-defined the content of Basel III such that in several areas it is materially non-compliant with it. In contrast, the United States has in many cases gone over and above minimum standards. What explains this US-EU divergence? I focus on the potential causal role of the banking industry itself in bringing about this divergence. I argue that while advocacy by the banking industry is a natural culprit for this divergence, it is incorrect to assume that financial industry advocacy efforts in the EU were simply more powerful than their weaker US counterparts over global rules. The banking reform agenda, from the start, was characteristic of regulatory opportunism by the US regulators. While many advocacy efforts subsequent to Basel III’s formation were successful in the EU, their policy-shaping capacities were largely a function of the ability to ‘win back’ ground that was lost in earlier phases in Basel when US regulators were able to set the agenda. Thus, while the EU-US divergence we observe is real and important, it is not monocausally the result of stronger banking lobbies in Europe.