Is UK banking getting a fair deal from Brussels?

Practicus Financial Services recently organised a round-table discussion under Chatham House Rules on the future challenges of EU regulation for the European banking industry. The session held at the British Banker’s Association offices in Old Broad Street EC2 was attended by senior risk and compliance executives from leading UK and Continental banks.

An EU Directorate representative delivered the opening address highlighting EU policy objectives and the revised CRD prudential requirements. Open debate explored these developments and also focused on the outcome of the recent G20 talks in Pittsburgh with the pronouncements of the Financial Stability Board. 

From the discussions it is clear that increased capital requirements, especially for trading book activities, will restrict future bank growth with a knock-on effect of cost to the consumer. Smaller international banks are inevitable. Liquidity is also a key component currently undergoing close examination by regulators and its future supervision will be given a position of central importance. When new quantitative standards are adopted banks will be expected to undertake rigorous stress testing.

Despite its use by the Spanish authorities, plans within the CRD 4 proposals to introduce dynamic provisioning have not proved universally popular although these are only at a consultation stage. Dynamic provisioning is seen as a way of taming the pro-cyclical tendencies of capital requirements. Many fear that despite the best of intentions, complexity in delivery and timing of application will mean that the law of unintended consequences will apply. Whatever transpires, it is vital that any new capital standards be adopted globally to the same timetable if Europe, and particularly London, is not to be disadvantaged.

Concern was raised that the EU was essentially a ‘one size fits all’ regime as illustrated by the recent Solvency 2 and the AIFD (Alternative Investment Fund Managers Directive) directives. Many banks have an insurance arm and UK banks have been greatly alarmed by a potential Solvency 2 interpretation that would see the withdrawal of the liquidity premium in capital provisions for annuity business. This is a potential bombshell for the pensions market, unique to the UK, as the loss of a liquidity premium would have a dramatic demand on capital.  Insurers anticipate substantial product cost hikes which must, of course, be to the consumers’ detriment. UK banks and insurers must continue to lobby to ensure a satisfactory outcome for this problem acceptable to its continental neighbours.

Reservations were also voiced over the new ESRB (European Systemic Risk Board) announced by EU Commissioners McCreevy and Almunia, with some pessimism on how it might function. Concern was raised that the ESRB, with 60 institutional members, might be too cumbersome although it was hoped that its executive board could provide the necessary leadership and market intelligence. Opinion indicates that De Larosiere was restricted by existing frameworks and legislative powers but new levels of European cooperation will be required if the supervisory colleges and upgraded Lamfalussy agencies (EBA, ESMA, EIOPA) are to be fully effective. It is recognized that these agencies will play a key role in supervising CRAs (Credit Reference Agencies). 

Although highlighted by G20 and the media, banking bonus structures were not viewed as a major issue. The FSA has already moved on remuneration and all can see benefits in linking reward and bonuses to the delivery of longer term objectives. Clawback should not be necessary if appropriate objectives have been selected. The differences between UK principles-based regulators and continental supervisors largely operating through a rule book were also explored. In conclusion, it was felt that there is no real difference.  Ultimately, compliance demands obeyance with a set of rules that must exist in one shape or another.

In summary, the European legislative process is a long one and publication of, say, a level 1 directive text should not be viewed as a final barrier to any lobbying activity. The latter should be focused on the relevant EU sector teams. FSIs in the EU must continue to expect great change in the GRC arena with increased regulatory supervision and a committed enforcement regime. Practicus, already well versed in providing interim resource for major change management programmes, seeks to assist firms in meeting this challenge.