Banking 2020: A Vision for the Future, book launch speech by Sharon Bowles MEP
Banking 2020: A Vision for the Future (Edited by Steve Tolley)
Introductory speech at book launch by Sharon Bowles MEP
"Steve tells me he chose the 2020 date because by then various measures that have been legislated or are in the pipeline will have come into force.
"To mention a few:
"The major reform on capital - Basel 3 - which comes in via the epic-proportioned Capital Requirements Regulation and Directive (known collectively as CRD4) has several relevant start dates - 2014 for most things through to 2018, by which time we should have the final rules on liquidity and leverage calibrated and running.
"Alongside capital structural reform, ubiquitously called the Vickers reforms in the UK, will be underway by 2019. There are a few EU hiccups here given that financial services are predominantly done at the EU level as part of the Single Market. For example, we have just won one battle in CRD4 to make sure that the 3% additional capital inside the ring fence is allowed, but we still have to find out whether or not anything in the EU structural reform package interferes with it. My guess is that there will be nail biting over the issue as it goes along but it will be all right on the night, and fencing between parts of banks and some corresponding capital allocation may well be in place quite widely though not identical everywhere.
"We are also in the throes of negotiating the EU Recovery and Resolution Directive, laying out the rules for putting banks into resolution and the hierarchy of who loses their money and how resolution funds are to work. There are many interjections from the sidelines here - including from the Bank of England, The European Central Bank, and the Bank for International Settlement - that are not all the same - and neither are the various funding mechanisms in existence in Member States. So there will be the usual tightrope to walk of European legislation.
"Some of these reforms are complicated.
"The bank capital rules still reply heavily on risk weighting and internal models for banks, and are horribly complex. This breeds the wrong attitudes of trying to arbitrage the rules instead of behaving morally.
"My thoughts here are that we will start to get a better grip on models. This should happen one way or another in the EU as a part of Single Market considerations and sharing of best practice, which nowadays is not quite an entirely voluntary matter.
"Internationally, at the Basle committee, there seems rather a chant of 'same rules'. Recent legislative tussles have led me to also look for 'same outcomes', because the truth is that the same rules never yield the same outcomes when not just bank models but market conditions vary hugely. So I consider moves to outcome oriented and simplified rules as a good way to go in future.
"So, just as we are about to implement the most complex set of rules ever on banking - which also interacts with some pretty complex new rules on derivatives, in the already complex but still awaiting lots of calibration trading book - I am predicting that the next moves will be to simplify.
"My reasoning is simple. Here's one example:
"Right now in the US we are seeing the resurrection of securitisations and collateralised loan obligations, on target to outstrip where they got to in 2007. Europe is desperate to follow suit to generate growth. I'll skip words of caution on cyclicality, but one of the first post-crisis pieces of legislation was to impose 'skin in the game' retention requirements on tranched securitisations.
"The idea was that if the seller of the product had to keep a 5% slice then they would look after what was going on because it had proven too complicated for anyone else to work it out.
"But running parallel with this revival are monstrous efforts by lawyers to wriggle out of the skin in the game retention principle, so that the safeguard is ineffective. This is an example of a simple measure, made complex, and then designed around.
"The latest CRD rules may well make retention work again but the fact is the arms race of regulator versus regulated is no contest. So it is no surprise to me that the UK Banking Committee proposed 'electrifying' the Vickers ring fence to counteract circumvention.
"That is an indicator for the future - big deterrents for straying from the spirit and intent of regulation, which then can be made simpler.
"Would simpler, outcome oriented, rules with a big deterrent work?
"It didn't in the recent past because there was neither the manpower to police it nor the will for massive sanctions.
"One of the things necessary is for supervisors not to be frightened to use the deterrent for fear of wider systemic consequences. This is helped by having better resolution mechanisms. Indeed they are fundamental.
"When resolution of a bank is both more possible without rocking the system, and it is defined in rules under which conditions resolution will be triggered by supervisors, then supervisory forbearance should go.
"A second requirement is better transparency for investors to be able to assess the state of a bank; after all, one of the points about all the new resolution rules is to make it clear that implicit state guarantees are gone. Shareholders and bondholders will have to be wiped out before intervention by any state or pooled rescue fund, so they need to be able to asses that chance rather better than now.
"One useful newly arriving transparency measure is disclosure of the level of unencumbered assets - something that I did get into CRD4 along with various other not-so-publicised interesting extras. This will let investors see how exposed they really are.
"So, what I see we are building is forcing more transparency and forcing investors to police what they invest in. This should begin to move us on - or back to - investment becoming more knowledge-based, with demands from investors for simplification. That should, I hope, also lay the conditions and space in which to grow innovative new methods of banking and asset allocation.
"Indeed, in my contribution to Steve's book I put forward an experimental idea by my co-author, Damian Horton, that could move into such a space, breaking down rigid business structures and matching with new developments in financing to make it easier to create small businesses that can scale upwards.
"Capitalism is at its best through trial and error, failure and improvement. We lost that with 'too big to fail' and now we are trying to restore banks to that condition.
"If we do not succeed, then either dinosaur banks may find themselves circumvented, or for all our efforts there will be no change and the next crisis will easily be as systemic as the last. Who knows, but a few of us have tried to give food for thought in the book and the discussion to come."
You can read Sharon and Damian's chapter, 'The Future of Banking - Going with the Crowd' here.
You can order the book, 'Banking 2020: A Vision for the Future' here.