Opening remarks at Banking Structure Conference - by Sharon Bowles MEP
By Sharon Bowles MEP
Philippe - thank you very much for inviting me to say a few introductory words. We are working hard, and well, together on CRD along with other colleagues and the issue on banking structure and the Vickers proposals have already had some impact on our work. Likewise if I look over to work that we are doing on MiFID, coming to grips with what IS proprietary trading, albeit only in the context of an Organised Trading Facility, is exercising our minds.
But to go back to the beginning - we all know why we are contemplating these issues, is it as a result of the financial crisis and the various interconnections, complexities, surprises and ignorance in and about the banking sector that was shown up and is well documented. Now we are reeling under the weight of legislation and follow on rulemaking and two of the most important items - crisis management and shadow banking will soon be coming to the fore in European legislation.
In the Parliament quite a lot of us have the view that crisis management in particular, but also shadow banking, should have been done at the start rather than the end of the legislative program, and I think that bank structure is within the same let's-get-a-grip-on-this interlinked universe as crisis management and shadow banking.
Ring-fencing and separation of proprietary trading look like tools to help in a complex world of complex products and of course they are steps in crisis management, or crisis prevention. I look forward to the presentations and discussions to come. In the absence of having any specific legislation yet, I will take this opportunity to set out some of the things Parliament has been doing in CRD in particular to begin to address the wider related issues of crisis management and shadow banking. I also have a query or two on the bank structure issues.
The Parliament wanted crisis management and resolution as part of the European Supervisory Architecture, and much of what we proposed two years ago is still relevant - indeed it is even being reinvented in other places. But to begin at the beginning, for us it really started some 5 years ago with Group Support in Solvency 2 where the idea was to optimise use of capital at Group level by allowing some of the prudential capital to be moved around the group, but with the ability to 'call in' a top up into a particular subsidiary should local conditions require it.
It soon became clear that while the process would work during good times, the picture looked slightly different at times of wider stress at the group level. So we tried to include text to require binding legal transfer of funds, free from suspensive actions, that were a fair share belonging to a particular member of the group, valid even at time of insolvency. This was a kind of cross border living will if you like. To cut a long story short we failed, group support was put on the back burner, and then in the subsequent financial crisis the demise of several cross border banks played out the feared scenarios almost to perfection.
This firmed up our resolve to have workable resolution and living wills, and so we have welcomed international moves in this direction but regret no progress in many Member States. Hence we have inserted into our amendments on CRD a requirement for resolution authorities, living wills, coordinating involvement of the EBA - as envisaged in the EBA regulation - and a one year timetable for SIFIs to have plans in place. There are also some basic bail-in proposals. There is plenty of room for all the additional detail that will come in the full blown Commission proposal, but we are clear - the starting gun for getting well understood basics underway needs to be fired with CRD4. It's overdue and we do not want to wait that extra year or so.
In our amendments we have also inserted requests for reports on bank structure and made it clear that nothing within CRD or CRR should stop the implementation of reforms such as separation of retail and investment banking. We have also been asked to make certain changes in order to ensure that the Vickers' proposals can be done on a pillar 1 basis, and that has been inserted, allowing deductions of investments in other entities from capital of the retail entity.
Now I mentioned shadow banking too, and here we have taken a similar line. It is clearly the case that with most shadow activity, one leg of it is in the regulated banking sector. Banks created, sold, swapped or repo'd the alphabet soup of CDS, ABS, CDO and MBS assets, used SIVs, ETFs and money market funds. So our view is that if one leg of it is in the banking sector we should grab that leg in banking regulation, which can be done now. So in CRD we have inserted reporting for repo and securities becuse we need to know who owns what. Ultimately only registered lending should to be taken into account in insolvency proceedings. We have also proposed a large exposure limit with respect to shadow entities.
Turning now to the specifics of the work of today. Ring fencing rather than going for a full blown separation of retail and investment banking looks tempting. I note the idea is also to try and maintain the strength of diversity but have an arm's length relationship with the rest of the group. Extra capital allocated solely to the ring fenced entity plays a part. If it encourages more equity, and I mean equity, then I am all for that too.
As ever the devil will be in the detail and I look forward to learning more, in particular how it works for the investor. How do you ring fence or separate out the corporate debt and when do you do it? Is there a formula or new issues? Given the complexity of swaps and repos it would have to be the retail part that is in some way demerged and ring fenced. So that seems to mean that investors are left holding a different entity from what they thought, i.e. a pure investment bank, maybe minus a big chunk of capital, do they know this, how do they feel about it, what does it do to prices, do they have to be compensated, is it legal or will there be lawsuits? Is this actually any easier than setting up new retail banks? Is the diversity and the goodwill of the Group retained or will it become remote? Might it even discourage being given support from the parent should that be needed, and again how does that fit with the investors. How much does this cost compared to the Volcker alternative? I doubt these are new questions but analysts on the buy side are asking such questions.
Turning to the Volcker alternative, as I said we have already been pondering in MiFID how to define proprietary trading and distinguish it from client facilitation and market making. I know there are tests, quite a lot, and that seems to detract a little from the basic simplicity of the idea. The fact that there are complex rules is because of complex products and procedures, and the conclusion I draw from that is that we have to make things simpler.
The Volcker implementation and its extra-territorial impact is of course also causing significant tensions in EU-US relationships, but that is for another day. However we should not forget to join up - it's in all our interests.
So whatever we do by way of structural separation, if we do it at all - and in the context of ringfencing and what capital counts towards what, I throw in the European bankassurance model as an added complication - it must not diminish the drive for simplicity.
As I said, Parliament is standing ready to enable banking restructuring, we will be preparing a report or resolution and we are meeting with Erkki Liikanen, so this conference is welcome in its timing and I look forward to learning more.
ENDS