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November 2, 2011 2:26 pm
In the months leading up to the Group of 20 nations meeting in Cannes, global banking executives have mounted a furious attack on the Basel III reforms that will force their institutions to hold more capital and liquid assets.
They single out the capital surcharge for “global systemically important financial institutions” (GSifis), which is on the agenda for formal endorsement by the G20. It will, they say, hobble already fragile economic growth and force the 28 to 30 largest and most interconnected banks to shrink their lending to the world economy.
“There is an acute danger that the pursuit of financial stability imposes too great a cost on economic growth and job creation at a fragile time for the world economy,” Peter Sands, chief executive of Standard Chartered said in September as he unveiled an industry study that emphasised the potential cost of the regulations.
Regulators, meanwhile, want the G20 politicians to endorse not only their capital regime but also their plans to force banks to write their own “living wills” that would make it easier to break up or shut down failing institutions.
Without a global framework for handling cross-border bank failures, the world economy is still vulnerable to a repeat of the disastrous 2008 collapse of Lehman Brothers.
Lord Turner, chairman of the UK Financial Services Authority, said recently: “We are committed, in the UK and globally, to putting a stop to ‘too big to fail’ status, with resolution tools which can deal smoothly with the failure of a bank however large.”
So far, signs point to a G20 endorsement of both the “GSifi” surcharge and the resolution framework, but it is not at all clear what that rhetoric will mean in practice.
Recent history suggests that national interests – both in protecting local champions and in wooing overseas business – tend to reassert themselves when the G20 leaders go home.
Agreements reached at prior summits on raising bank capital requirements, tying banker pay to risk and taming over-the-counter derivatives, have all become snarled in local issues during the implementation phase.
Steve Culp, global managing director of Accenture’s risk management practice, says: “In many ways, the 2009 London G20 marked the high-water point for collaboration across the global political, industry and regulatory agendas.
“Since that event, local and national agendas have taken precedence over a common and consistent set of global rules.”
While many of the efforts are aimed at furthering the agreements, the actual details often conflict, causing confusion and raising potential costs for the industry.
The European Union is drafting laws on bank capital, derivatives trading, credit rating agencies and a host of other measures, while the US is drafting more than 100 rules, many of them on similar subjects, to implement its Dodd-Frank reform law.
David Holcombe, specialist in trading at Rule Financial business and technology consultancy, says: “The barrage of reforms and regulations is being applied differently by the various regional and national regulators.
“This extraterritoriality is resulting in a disjointed approach to improving transparency and reducing risk across financial services, globally.
He adds: “This encourages regulatory arbitrage. The jurisdiction that enforces the first or most negative set of rules will drive participants elsewhere, which in the long term is damaging to any market that needs multiple types of investors with different investment horizons.”
Research by Accenture shows that more than 150 pieces of global or domestic financial services regulations are being written right now on top of the US Dodd-Frank process.
In some ways, this was only to be expected, given the different national priorities. The US, UK and Switzerland are especially focused on preventing a repeat of the crisis, but other countries have different goals.
Tim Kirk, head of financial services at BDO, a consultancy, says: “While global consistency is proving more challenging than governments and regulators may have expected, industry practitioners are much less surprised ...
“Some governments place different priority on attracting business and being seen as a competitive place to do business as opposed to ever tighter regulatory standards and the higher costs these bring.”
The continuing crisis in the eurozone and faltering economies worldwide have also damped enthusiasm for tough reform.
Giles Williams, co-head of KPMG’s Regulatory Centre of Excellence in Europe, says: “The recognition that bank lending is crucial to stimulating the global economy is putting significant pressure on the financial stability policy objectives. The politicians face a real conundrum that too much safety could lead to further economic contraction.”
Bankers, meanwhile, are rethinking which business lines will still be profitable under the new regimes and are warning that some activities – including lending – could become much more expensive.
Patricia Jackson of Ernst & Young, says: “There is no doubt that the combination of higher capital, leverage restrictions and liquidity buffers is putting pressure on the industry.”
These pressures are likely to make it hard for the G20 to decide what to do next.
With global regulatory groups such as the Basel Committee on Banking Supervision (author of the Basel III reforms) and the Financial Stability Board focused on implementation and ensuring level playing fields and the banking industry struggling to rethink its business models, where should politicians put their energy?
Barbara Ridpath, chief executive of the International Centre for Financial Regulation, a think tank, has a partial answer.
“It’s critical that G20 leaders recognise the role of securities markets in raising finance for companies to grow, and providing long-term investment returns for investors and savers ... They have got to keep their ‘eye on the prize’ of how good regulation can support growth,” she says.
Former regulator Clifford Smout, now with Deloitte, has another prediction. He says: “On the whole, discussion has been on the prudential side ... It hasn’t really moved on to consider consumer protection.
“But if you look at the US, UK and EU, that is clearly part of the issue. That may be a theme that comes to the fore over the long term.” he says.
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