The weather in Basel remains wintry and cold. And the climate inside the intimidating BIS Tower – headquarters of the Bank for International Settlements ( BIS ), where polyglot teams of economists and regulators worry about the future – is not much more congenial, as the transatlantic tensions that have splintered NATO begin to reverberate through the financial world.

Those with long memories – or at least some familiarity with history – know that when plans to launch the BIS were hatched in the 1920s, the United States declined to be involved. Instead, America’s potential seat was kept warm by J.P. Morgan.

At the 1944 Bretton Woods Conference, the US argued that the BIS was no longer needed after the creation of the International Monetary Fund and the World Bank, and formally proposed abolishing it. It took a personal intervention by John Maynard Keynes himself to convince the US that it was worth keeping the BIS as a congenial habitat for central bankers. But there has never been an American in charge of the BIS; its incoming general manager, Pablo Hernández de Cos, is a Spaniard.

While the BIS itself may not yet be under threat, its headquarters is home to a menagerie of regulatory bodies, including the venerable Basel Committee on Banking Supervision and the Financial Stability Board ( FSB ), as well as various groups setting international regulations for insurers, deposit protection schemes, and much of the financial world’s flora and fauna.

The BIS and its affiliated bodies are currently focused on finalizing Basel 3.1, a set of regulations for so-called non-bank financial intermediaries – such as hedge and private equity funds, which account for a growing proportion of new credit extension – and grappling with the challenges posed by the crypto world. Unsurprisingly, they are also concerned about the impact of climate change on the financial sector.

These are all difficult areas where global regulators, despite working toward global agreements wherever possible, struggle to reach consensus. While the details of financial regulation have not yet reached the top of the new US administration’s agenda, it seems safe to say that President Donald Trump’s views are well outside the Basel ring road.

There have already been some straws in the wind. In January, the Federal Reserve withdrew from the Network for Greening the Financial System, a large group of central banks wrestling with the problem of insulating the financial system from the destabilizing effects of climate change and the unintended consequences of mitigation efforts. And before that, pressure from Republican-controlled US states has led to the collapse of various groups established by the United Nations and former Bank of England governor Mark Carney, such as the Net-Zero Insurance Alliance.

But those are not the cornerstones of the global financial edifice. A more pressing issue is the future of the Basel Committee itself. The completion of Basel 3.1 – also known as “Basel Endgame” – became a political football during the US election campaign following the Fed’s proposal for sizeable increases in banks’ mandatory capital levels. Republicans fiercely opposed the plan, and with the departure of its key Fed champion, vice-chair for Supervision Michael Barr, its future looks highly uncertain.

Meanwhile, regulators in the European Union and the United Kingdom have delayed their own planned reforms until they see how the US debate plays out. But a reassuring outcome seems increasingly unlikely.

A world where capital requirements for US banks are significantly lower than those imposed on their European or Japanese counterparts would be hard to manage. And if the Fed effectively abandons Basel 3.1, what purpose would the Basel Committee serve? Its agenda is already thin. Will the US even continue to participate? Substituting J.P. Morgan for the Fed would not work this time – and in any case, JPMorgan Chase CEO Jamie Dimon’s views on Basel are not suitable for print.

The same goes for the FSB, which US politicians have never been enthusiastic about. Former US treasury secretary Larry Summers, hardly a member of Team Trump, attempted to strangle it at birth, and its current agenda is very much at odds with the new administration’s priorities. For example, the FSB is currently soliciting views on imposing leverage limits on hedge funds – a deeply unpopular idea on Florida golf courses. Even under former President Joe Biden, US regulators were reluctant to engage with the FSB. Might they now walk away entirely?

On the crypto front, divisions are becoming increasingly visible, particularly over central bank digital currencies ( CBDCs ). The European Central Bank is pressing ahead with plans to launch a digital euro, viewing it as a matter of monetary sovereignty. Should the EU continue to be buffeted by the winds of US foreign policy, especially when America has already weaponized the dollar-based global payments system and may do so again?

This question is particularly pertinent, given US policymakers’ lack of enthusiasm about CBDCs. Trump has explicitly barred the Fed from working on a digital dollar, arguing that it would get in the way of private-sector stablecoins and memecoins. Global regulators, in turn, are left scratching their heads about the long-term implications of a digital euro with no US equivalent.

The BIS is located in Basel largely because the layout of Europe’s railway system a century ago made it a convenient meeting point for central bank governors. Today, however, it is not railway lines but political fault lines that cut through Basel, threatening to destabilize the global financial architecture. Can the Tower of Basel survive, or will it devolve into a modern-day Tower of Babel – a place of many tongues where minds no longer meet?

Howard Davies is the chairman of NatWest Group and, formerly, a first chairman of the United Kingdom’s Financial Services Authority, the director of the London School of Economics, a deputy governor of the Bank of England and the director-general of the Confederation of British Industry.

Copyright: Project Syndicate