By Huw Jones and Maya Nikolaeva
LONDON/PARIS (Reuters) - When financial watchdogs gather in Chile next week to finalize global rules on bank capital, transatlantic tensions will overshadow the technical discussions.
Seven years after world leaders agreed in Pittsburgh to toughen and coordinate their banking rulebooks, the global consensus is starting to fray just as regulators try to put in place the last pieces of regulation aimed at averting a repeat of the 2007-2008 financial crisis.
European politicians, as well as banks, have been noisy in opposing the regulation under discussion - known in the industry as Basel IV - saying it would put their lenders at a disadvantage.
U.S. policymakers say the Basel Committee regulators who drew up the rules should stand firm.
But such disagreements are now overshadowed by the apparent opposition of U.S. President-elect Donald Trump to vast swathes of the post-crisis regulation.
Trump has said he would revoke the Dodd Frank rules agreed by U.S. lawmakers in 2010, whose 22,000 pages encompass significant parts of the globally agreed regulatory agenda.
Trump says the rules have failed to increase jobs and growth. His stance prompted Valdis Dombrovskis, the European Union's financial services chief, to say this week that Europe expects its international partners to stick to globally-agreed standards.
The changing dynamics threaten to drive a chasm between regulatory stances in Europe and the United States, at time when U.S. megabanks are stealing a march on their European rivals.
"In a world of globally linked and integrated markets, a 'chacun pour soi' approach is the worst possible policy response from the most powerful country in the Western world with the biggest financial markets," said David Wright, a former top European Commission official who worked on the EU's regulatory response to the 2007-09 financial crisis, and now with Flint Global advisors.
Some European lawmakers have jumped on Trump's stated intentions as a lever to weaken the capital rules that will be discussed next week, with some suggesting there should be a delay on bringing in the regulation until U.S. policy is clearer.
EU plans put out this week, to force U.S. and other foreign banks on its turf to potentially hold more capital, will raise regulatory tensions further.
"The proposals challenge the increasingly fragile state of international regulatory coordination," said David Strachan, a partner at Deloitte's regulatory strategy arm.
REGULATORS AT ODDS
The rules under discussion in Chile include greater use of a standard model for how banks calculate the risk attached to assets such as mortgages and large corporate loans.
Currently banks in Europe tend to use their own internal models, based on how similar assets have performed historically.
In the likes of France and Germany, where default rates have been historically low, banks say they will face a sharp hike in capital requirements if the new rules come in, especially for specialty lending such as shipping and project finance.
"Capital requirements... could double or even more," potentially hurting French and German banks, said Vincent Grataloup, Risk Management Consultant at Boston Consulting Group.
France's biggest bank, BNP Paribas, has said any increase in dividend payout over 2017-2020 "depends a lot on regulation".
EU policymakers worry that the new Basel rules could crimp lending to an already struggling economy.
Under pressure from Europe and Japan, Basel regulators are expected to dilute parts of these rules this week, aiming to obtain full endorsement from their oversight body in January. No timeline has been set for their introduction.
Top banks – who spent years lobbying against post-crisis regulation - would be wary of a wholesale repeal of Dodd Frank given that some alternatives being touted are far blunter.
A bank's main bulwark against collapse is its capital buffers, whose size is linked to the risk from loans and trades on its books.
Jose Maria Roldan, chairman of the Spanish Banking Association and a former Basel Committee member, said that if the United States ditched this "risk sensitive" approach and made the leverage ratio the main benchmark of resilience, as has been suggested, it would disrupt global regulatory consensus far more than revoking U.S.-inspired elements of Dodd Frank.
The leverage ratio is a measure of capital that does not take into account the riskiness of assets and is seen as a "backstop" to the risk-sensitive approach.
"If you went further in the direction of the leverage ratio, it would be very difficult. If the United States said you must have a leverage ratio of 10 percent, that can't fly in Europe," Roldan said.
Europe wants to maintain this risk-sensitive approach - one reason why it has threatened a boycott, leaving regulators stuck in political crosshairs.
"If today politicians want to take over this work in place of experts, it is quite possible. Would this be beneficial for Europe and the rest of the world? This is not for me to judge. My job ... is to get to a conclusion," Stefan Ingves, chairman of the Basel Committee told Revue Banque this week.
(Editing by Ruth Pitchford)