Regulators’ race to the bottom will imperil taxpayers.
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The UK, US, and continental Europe continue their bank deregulatory race to the bottom. According to a recent Fitch Ratings report, “The European Commission and UK authorities proposed targeted regulatory easing to improve competitiveness, buffer usability, and market-risk model practicality.” Unfortunately, there is a gradual divergence in these three geographic areas in how financial risk is measured, how capital adequacy is defined, and how resilience is enforced. In its global reviews, the IMF has warned against bank regulatory fragmentation, because when the US, UK, and EU create customized variations or delay implementations, it creates “blind spots,” reduces transparency, and increases the potential for cross-border regulatory arbitrage.
Comparing Global Regulatory Paths: US, UK, and EU
Fitch Ratings Content
As I have argued for over two decades, bank deregulation ends up being a serious problem for governments and unsuspecting taxpayers. Given heightened geopolitical tensions, a rising interest rate environment, and mounting problems with AI companies, private credit and private equity firms, this bank deregulation must stop. Left in place, it means that banks will be less prepared to cope if any of the aforementioned worsen. Compounding the problem, in all three jurisdictions, regulators have been reducing the number of onsite and offsite examiners. Who will be there to detect problems and to sound the alarm?
Rising Rate Environment
Now that the Federal Reserve has started to raise rates, there is a strong chance that individual and corporate default rates will start to rise. As I wrote earlier this month, markets are underpricing credit risk. This is precisely the wrong time to weaken bank safeguards. Even before the Fed’s rate rise, Fitch Ratings warned that an AI-related equity shock could trigger a global slowdown.
Exposures to Private Equity and Private Credit Firms
Like corporations, private equity and private credit firms are vulnerable to rising rates because they tend to invest in and lend to leveraged firms. Banks and insurance companies should be especially concerned about the performance of these private market firms given how interconnected they are to them. Deregulation weakens the very buffers banks would need if these exposures sour.
The IMF has explicitly warned that as bank regulations are being changed, risk is pooling in heavily leveraged, opaque private credit markets and offshore hedge fund operations. Because these non-banks are highly interconnected with UK clearing, repo, and sovereign debt markets, the IMF emphasizes that loosening structural bank definitions could cause spillovers if a non-bank market implodes.
Concluding Thoughts
While regulators frame these structural changes as necessary steps toward modernization and economic competitiveness, the synchronized rollback across the US, UK, and EU arrives at a highly volatile moment for the global financial ecosystem. By thinning out loss-absorbing capital cushions and relaxing leverage backstops, authorities are exposing the banking sector to a compounding matrix of modern vulnerabilities. This regulatory easing is occurring against a backdrop of severe geopolitical friction and a structurally higher interest rate environment, which are already putting pressure on traditional corporate assets. Concurrently, the banking system faces untested operational exposure from rapid AI integration, alongside massive, opaque dependencies on private credit and private equity markets. If a systemic shock emerges from these highly leveraged, non-bank financial sectors, this coordinated dilution of Basel III protections leaves global banks with a dangerously reduced margin of safety to absorb the fallout before risking taxpayer-funded interventions. With reductions in the number of examiners in the Europe, UK, and US to detect problems and sound the alarm, this bank deregulation must stop.
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