QED speech on EU-US financial regulation by Sharon Bowles MEP
In the EU we have done a wider range of Regulation than in Dodd Frank. That is our fault, but in addition we have done AIFMD, created the European Supervisory Authorities, and updated or created other new legislation ranging from AIFMD to mortgages and including PRIPS, Market Abuse, and MiFID to go alongside CRD and EMIR. There has also been a lot of economic governance stuff too.
Also at the legislative level of the Council and Parliament we have to deal with a lot of the detail that in the US and other sovereign states can be done by regulators. This is because significant policy decisions can not be delegated.
The Parliament also remains involved in the next level of legislation - so called Level 2 - and detailed technical standards where it has a veto, which we are not afraid to use. However, in general we keep up and cooperate and get problems sorted without using a veto. And at the moment, on EMIR, we have discussed the timing and arrangement of the next cluster of technical standards, some of which form a package with equivalence findings. So, although we do not as such have a veto over equivalence, we have ways of exerting influence.
However, after all this, we make one set of rules between the Parliament, Council, Commission and ESAs. We thrash out our differences but end with one set, not conflicting sets for different regulators - which is different from the result in some countries, notably the US.
The one set of rules for the EU helps other countries in that we do not create overlapping sets of regulations.
A lot of effort has gone into following the G20 framework and then either individual national rules or sets of rules from international standard setting bodies such as Basle, IOSCO, SFB and so forth.
But regulators and standard setters cannot take all the decisions and you can not escape from the fact that many of the 'technical matters' embedded in legislation have highly political results for which it is politicians that are accountable. It is politicians who have lost seats and governments that have fallen as a consequence of the financial crisis. I have not seen any standard setters or regulators sacked.
If we look briefly at Basle they have still not finished the trading book - which seems to me to have been hanging over since Basle II. What they have done is not perfect either, for example on CVA. The simple fact is that markets are not the same and so you do not get the same outcome - which is a fact worth thinking about when we talk of wanting equivalence on an 'outcomes' basis.
If we look at cross-border issues, then there are more issues than just competitive level playing field. Institutions operating cross-border need legal certainty over whose rules apply, and ideally this should be one set. Alas, as I have said, that is not even the case within countries that have overlapping regulators.
One set of rules is better for a level playing field and when measuring equivalence, like the recent rules from the SEC, we should be looking at outcomes, although that is sometimes more difficult than it sounds if you compare effect and enforcement as well as words.
Branches and subsidiaries is another issue. Sometimes we have both and we cannot have the situation where a customer or client is treated differently, or where competition is unequal depending on whether they use a branch or subsidiary. There also is a potential problem of creeping subsidiarisation or capital constraints.
Moving from cross-border institutions to cross-border transactions introduces a whole lot more problems, as we have found with derivatives.
Sticking for the moment with capital requirements, we have been doing (or not) Basle longer than derivatives coordination. Where have we got?
EU-US spats are mainly about competition, but a lot of the comparisons are bogus.
Not the same market, not the same scope and size of banks, not the same accounting rules, not the same banking models. Further, the rules are far too complex to ever be even-handed, which is why I am absolutely behind simplification.
Now the EU applies Basle to all banks, not just the large banks, and it is disingenuous to add together all the options embedded for proportionality, stretch them to the weakest and suggest that is what the EU is doing for large banks. That is just not the case and you all know it.
The latest spat is on the CVA charge, problems in which come from markets and complexity issues. The Basle proposal is all based on markets and trading book. Unfortunately it only works in the US where there are deep corporate bond and CDS markets. Everywhere else it doesn't work, gives silly prices, and frankly it is a disaster for developing countries. I do not know what the EU regulators were doing round the Basle table, but this doesn't work. So now very quickly they should look at simplification and calibration and real economy impact.
I mentioned developing countries and really we have to test what we do more widely. This is not an EU-US universe, and where we are stuck between ourselves it may often be the solution to look wider instead of just trying to see which of us can win. Observations from third countries might teach us a few things.
So, derivatives. Well here there has been a huge effort at cooperations but there are still problems. I will choose a couple which I think are really serious, but they are not alone.
First, Trade Repositories. This was supposed to be one of the big wins of G20 and derivatives legislation. That supervisors, central banks and stability boards would have aggregate information, understand the build up of risks, flows and exposures. We would have global repositories. Instead, we have lack of information sharing and lots of repositories. This is not what was intended. If we do not get this information sharing sorted out then frankly I do not know why we are bothering with all this derivative malarkey.
CCPs, another mess. We have different liquidity requirements - that may well be the EU's fault - and different collateral. A CCP cannot be international without multiple authorisations, for example by the UK, ESMA, SEC and CFTC. Capital rules are uncertain, whose do you follow, ESMA, SEC or CFTC? And governance depends on which country's customers you are serving.
It gets worse for third countries outside the mainstream, which is totally unacceptable.
Finally, we all want this to be fair and workable and we have to keep at it. Moving to the future, standard setters like Basle have to look deeper and do more testing. And what have we done to move towards common electronic identifiers and real time transaction mapping? Those are issues that must be pursued, so we can really get an understanding of what is going on.
ENDS