Speech on banking regulation & Capital Requirements Directive, by Sharon Bowles MEP
"During this mandate the European Parliament has stepped up its impact on legislation.
"First, under the Lisbon Treaty more sectors came under co-decision, making the Parliament a true co-legislator over most areas of policy. This collective confidence has transmitted into areas such as financial services where we had co-decision already. Secondly, of course, the huge public impact of the financial crisis, and the role of Parliament being closer to public opinion, has added to determination in my committee.
"It should be recalled that the ECON committee covers much more than financial services. We do also what it says on the tin - economic and monetary affairs (where the committee did gain new co-decision power in the area of multilateral surveillance). That did not look much in terms of Treaty articles but has in fact been the basis of important and highly political legislation on economic governance.
"We also cover tax, where we only have an opinion because Council voting is still unanimous, and competition, which is primarily consultation but where a major co-decision proposal on damages and compensation actions has just been released.
"Our high-profile Monetary Dialogue hearings with the President of the European Central Bank has gained partners in the Economic Dialogue with Finance Ministers and a Supervisory Dialogue will be added for ECB bank supervision under the Single Supervisory Mechanism.
"Turning specifically to financial services by the time we get to the European elections next year we will have had 40 pieces of financial services legislation passing through committee, and also some related legislation such as transparency and accounting on which we provide input with respect to financial institutions to the legal affairs committee.
"As a point of interest, one of the things that I and ECON have supported for some time, indeed since about this time in the last Parliament, is XBRL and due to us this is now in the accounting directives.
"If we stay with statistics for a moment, as well as 40 pieces of financial services legislation, the committee has had many, many more meetings than other committees and the number of negotiation sessions with Council and Commission - so called trialogues - has already topped 230, and if you didn't know, I chair those too.
"The biggest dossier of course has been CRD4, the most complex set of rules ever on banking based on the Basel 3 rules, as modified and legislated for in the EU. As well as thousands of amendments, it took over 30 trialogue sessions - some long into the night.
"The CRD4 rules also interact with other pretty complex rules for derivatives and markets. All these rules have the objective of keeping banking and investment stable for the general good. Rules are complex because modern banking is complex - more complex than it should be - and because we are on a treadmill of trying to draw a precise line between the proper and improper for the sake of 'legal clarity' which often alas ends up opening the door to legal arbitrage.
"My ideal world would have far simpler rules, far harsher penalties for transgression, and be able to rely on stronger ethical codes not just in banking but in the professions that surround them - the accountants and lawyers - otherwise they drag one another down.
"Lately we are seeing moves against aggressive tax planning; well I would draw a comparison and outlaw aggressive regulatory lawyering too.
"Good banks need good lawyers. Moral banks need moral lawyers, and that is not defined solely by words on a page, interpreted purely to yield advantage to a bank against the intended greater good. If we had confidence in that we would need far fewer rules.
"So part of my unfinished business is to put a duty of care for the common regulatory good on to banks and their professional representatives, with penalties for deliberate frustration or circumvention of the 'pith and marrow' or basic intent of a regulation. And in case you were wondering, I have my eyes on the non-financial reporting directive. So that may get a lot more interesting, not least as it has been suggested by the European Council to cover country by country reporting of large companies.
"But the fact remains meanwhile that CRD4 is complex so let's have a look at some of what is in it, with a focus on some issues pursued by the European Parliament and why.
"First, there is more capital that has to be held - the 8% currently required stays but will have to include 4.5% rather than 2% Common Equity Tier 1, and then there is a range of new buffers on top of that.
"The buffers - this gets confusing.
"2.5% Conservation buffer of Common Equity - which has to be maintained but is not part of minimum capital.
"2.5% Countercyclical buffer - meant for macroeconomic control, some fear supervisors will never let it out.
"1% to 3% extra Common Equity for systemically important banks- this was insisted upon by the Parliament and is a compulsory level depending on SIFIness.
"A further 3% and beyond can be added by Member States for macro-prudential or systemic risks, up to 3% as of right - that is the Chancellor's bit for Vicker's ring fencing - and even higher if it is approved at the EU level.
"We have had an interesting time drafting how the SIFI and Vicker's buffers are meant or not meant to interact.
"All these buffers of course make banks safer and under the Recovery and Resolution Directive rules being negotiated now will all get 'bailed in' when banks fail before any taxpayer money is used, as too will bondholders and uninsured depositors in turn in the hierarchy that is being established.
"Other major new requirements in CRD4 are liquidity reporting, leverage ratio, and net stable funding ratio, although these will require further legislative steps when the information gathering/observation stages have been completed.
"The issue always in the headlines was the bonus cap, and its intention was to remove incentive for excessive risk taking, but in the bonus area there are also more reporting requirements and some loophole closing to allow claw back of 'golden hellos' or contract buyouts, building on the claw back and deferral that was introduced in CRD3.
"The Parliament also inserted basic crisis management provisions, so all banks have to have resolution plans and we embedded the coordinating role of EBA, which was in the EBA regulation but was being ignored. These things will be fleshed out further as other legislation comes through, but we were concerned that some basics should be nailed for all banks, not just large ones, to prevent backsliding.
"It is well documented that we are increasing capital on banks at the same time as wanting them to lend, and the Parliament introduced several measures aimed at helping growth and SMEs. This included changes to help SMEs, non-financial corporates, and Trade Finance.
"We reduced the SME loan and business start-up risk ratio by 30% and raised the retail threshold from 1 to 1.5 million Euros.
"Better trade finance treatment included risk weight adjustments that I have been pressing for some time: Basle had been too strict on a precautionary basis on trade finance, largely because there was not enough information about default rates - the main reason for which was that there are not that many! Basle's rules to increase capital requirements and look again later to see if they were wrong was the wrong way round. We took a first do no harm approach. So now banks will not have to post as much capital against this type of lending, which is less risky and is important to global trade, including for developing countries.
"Since doing this, there has been a lot more global talk about the EU having made the right call here and hopefully Basle will change this too.
"In a similar vein - and because of its impact on the real economy and trade - the Parliament has exempted all corporates from the Credit Valuation Adjustment charge. This is controversial but the objective again is to get the Basle committee to look at the methodology, which put simply just does not work unless you are a large bank operating in US markets where there are CDS markets to hedge in. The Basle CVA measure again impacted very badly on developing countries where related costs increased by up to 4 times, and not having FX swaps in place is not an option when trading in dollars is forced.
"Talk now is that Basle will be looking again given that, frankly, there is still a lot of unfinished business in the trading book and, as I see it, too much concentration on rules instead of outcomes.
"What I have learned from wrestling with the derivatives legislation, EMIR and CVA in CRD4 is that we cannot establish a level playing field just through rules, not only because of the usual complaints on differing accounting standards particularly in the US, but also because of the difference in models and market conditions. When we discuss third country issues we try to focus on outcomes not step by step comparability, and I am wondering now whether that notion may need applying more within Basle rules.
"Another issue of course is to get a better understanding of all those banking models and we have made a start in CRD4 in that banks will have to run their models against hypothetical ones set by the EBA. This is not intended as a harmonising method, but any outlier information, one way or another, will aid further understanding.
"Macro-prudential controls was another area where we had a tussle, mainly with the Commission which seemed rather hell bent on a one size fits all solution, but the Parliament and Council preserved some flexibility for country-specific issues. I have to say the negotiation on this was bizarre given that in simultaneous negotiation on the Single Supervisory Mechanism a lot of attention was being paid to the division of macroprudential power between the ECB and Member States and I had to keep reminding them they were fighting over nothing if we didn't fix CRD4. Nevertheless, keeping flexibility in the macro controls was one of the down to the wire issues in the final trialogue.
"The Parliament made quite a few changes to reporting, aiming mainly at transparency and shining light in to some of the areas linking to shadow banking.
"We included a requirement for reporting of unencumbered assets, securities lending, and repos in order to shed light on who owns what and who's pledged what to whom. The EBA is charged with making detailed rules. The reporting will be at least to the Competent Authority, and the Parliament had in mind that it should be public. On transparency, in general there is a recital that there should be information to ensure that investors and depositors are well informed on solvency.
"In liquidity reporting we have allowed a more diverse range of assets - it has been a concern of mine for some time that we are making dangers by too much sameness which is itself systemic. We have also tightened up on the repo language so that to qualify for being a liquid asset a repo must be simple and non-complex. The idea here was to stop swapping of 'originate to repo' baskets as a false way of generating liquidity.
"Another major reporting triumph for the Parliament was to get country by country reporting for banks. This was a significant breakthrough in what it represented - we hoped for a domino effect - and has since been followed by country by country reporting for extractives and the logging industry in the accounting and transparency directives, and as mentioned more is yet to come.
"Staying with reporting, there are some things that banks can choose not to disclose if they consider it proprietary. We have inserted that competent authorities must be on the lookout for abuse of this, and choosing not to disclose on the basis of information being proprietary does not discharge liability if that information turns out to be material.
"We have also introduced a central black list for sanctioned bankers so that their past is not left behind just through moving country within the EU.
"This is by no means a comprehensive list, but it may give a taste of what we have been up to. There are also many other measures on corporate governance and working towards better gender balance that have been included.
"Some of these reporting requirements are qualitative and some quantitative. In the area of quantitative reporting I have always supported making things both as simple and comparable as possible - hence support for XBRL - and I do not lose sight of the fact that data is only as good as the ways in which it can be interrogated.
"We have inserted some more generalised requirements in CRD 4 for the EBA to develop uniform reporting formats and IT solutions, and in various other pieces of legislation there are embedded encouragements to electronic and automatic ways of collecting information.
"In the longer term I really do think we should get ourselves out of the Middle Ages in financial reporting and get to real time transaction mapping.
"Perhaps I should just finish briefly on the Single Market in financial services. Due to having common rules, banks and other financial institutions can 'passport' their services into other EU countries without having to go through separate authorisations. This is hugely important for the UK's financial services industry. What it means though is that mistakes in one country can be easily transmitted to another, hence why all the main rules come from the European level. That is also why even if we were outside the EU we would still be taking the majority of the rules but without a negotiating voice.
"In capital requirements and other fields there is a move to have regulations rather than directives - less flexible but also no gold plating - and some rules such as for capital requirements are maximum harmonising which means Member States cannot just introduce new amounts of capital unilaterally or do other things that would be a distortion to the Single Market. Some see this as contentious and don't understand why standards cannot just be a minimum. There are good points on both sides of these arguments, and where we have ended up is a constrained degree of flexibility.
"There is no denying that the development of the banking union for the Eurozone is a challenge, including to the Single Market, but one to which the UK agrees to because stabilising the Euro is a UK priority even though we sit on the sidelines. The legislation that has been done to give the ECB new powers has also given it a duty of care for the Single Market, and that will be one of the matters that the European Parliament will monitor.
"Thank you for inviting me to speak at your conference and I am very sorry that I have to rush away."
ENDS