haldane on fixing banking October 30, 2012
Posted by Bradley in : financial regulation , add a commentAndy Haldane gave a speech to Occupy Economics yesterday. He noted:
the crisis was… the story of a system with in-built incentives for self-harm: in its structure, its leverage, its governance, the level and form of its remuneration, its (lack of) competition. Avoiding those self-destructive tendencies means changing the incentives and culture of finance, root and branch. This requires a systematic approach, a structural approach, a financial reformation.
He identified five cs of the ongoing financial reformation: culture; capital; compensation; credit; and competition. And he described some of the regulatory changes under way which relate to these five cs. Cultural change was described as being about separating banking from investment banking, which is only a small part of the sort of change some would like to see. And implementing the separation is proving to be really complex. But in discussing competition he talked about Handelsbanken:
They may be the fastest-expanding bank in the UK at the moment… Their business model is fascinating, Quaker-even, in its orientation. They offer only basic banking services, mortgages and small business loans, to people in a tight, locally-defined catchment area.
All credit decisions are taken locally by people, not centrally by a computer. No bonuses are paid and no-one has a sales-target. When the whole firm out-performs, a contribution is made to a pooled fund which is invested on employees’ behalf. The fruits of success are distributed equally and gratification is deferred.
For banking, this is back to the future. If that sounds attractive, then it is down to us – not regulators, not politicians, you and I – to deliver it. If as bank customers we want to change the culture of banking, then we should start by supporting those banks who are delivering that change. Putting your money where your mouth is would deliver far greater and more durable change than any amount of banker-bashing.
eu summit and banking union October 19, 2012
Posted by Bradley in : eu, financial regulation , add a commentThe final Presidency conclusions differed a bit from the draft. For example, the roadmap the European Council wants in December is now to include “concrete proposals” to achieve the following:
The process towards deeper economic and monetary union should build on the EU’s institutional and legal framework and be characterised by openness and transparency towards Member States which do not use the single currency and by respect for the integrity of the Single Market.
The draft had the objective but not the concrete proposals idea. There’s also some redrafting of the timetable- the SSM legislative framework is to be agreed by the new year and operational implementation will follow. The language about the accountability of the ECB changed. Now:
There is a need to ensure a clear separation between ECB monetary policy and supervision functions, and the equitable treatment and representation of both euro and non-euro area Member States participating in the SSM. Accountability takes place at the level at which decisions are taken and implemented. The SSM will be based on the highest standards for bank supervision and the ECB will be able, in a differentiated way, to carry out direct supervision. It will also be in a position to use the effective powers conferred on it by the legislation as soon as it comes into force. In addition, it is of paramount importance to establish a single rulebook underpinning the centralised supervision.
This is still not a model of clarity. And they kick the can down the road on voting in the EBA:
It is important to ensure a level playing field between those Member States which take part in the SSM and those which do not, in full respect of the integrity of the single market in financial services. An acceptable and balanced solution is needed regarding changes to voting modalities and decisions under the European Banking Authority (EBA) Regulation, taking account of possible evolutions in the participation in the SSM, that ensures nondiscriminatory and effective decision-making within the Single Market. On this basis, the EBA should retain its existing powers and responsibilities.
The conclusions state that within the euro area “Strong mechanisms for democratic legitimacy and accountability are necessary”. But whereas the draft conclusions suggested that the EU should explore the idea of enhancing the role of the social partners, this language does not appear in the final conclusions.
Update: Although there’s not much sign of agreement on critical details, some groups have reacted positively to the summit. For example, the EESC:
The EESC is pleased to learn that, even though belated, a European banking union will come to life. It is crucial that the Member State governments have the breadth of vision to create more Europe, handing over some powers and ensuring that they can be applied, in order to achieve effective European governance that is socially useful and economically efficient. New and stricter rules will offer security to people and markets.
eu summit: not much visisble progress on european banking union October 18, 2012
Posted by Bradley in : financial regulation , add a commentThe Draft Conclusions of the European Council Meeting (via euractiv) don’t suggest that there’s much progress on achieving the European Banking Union although they urge legislators to make progress. Meanwhile, in a speech in Poland, Andrea Enria of the EBA worried about the future of the single market as domestic bank regulators “strongly encourage a de-risking process which also entails lower exposures to counterparts in other more fragile or stressed Member States.” And he made the expertise argument again as a way of resolving the banking union issues:
I would invite to think out of the box and consider also decision making mechanisms that are less based on country representation and more on technical skills and accountability frameworks. We need the best people we have in Europe to design high quality rules and implement effective supervision, in the common interest of savers in the whole area; and we need mechanisms to ensure that their decisions do not unduly penalise any actor in the Single Market. More reliance on independent decision making bodies, composed of experts selected on the basis of their technical skills, would put all countries, in and outside the euro area, on the same footing. It would ensure that decisions are taken in the best European interest, not as a compromise amongst different national positions. Monitoring mechanisms could then ensure appropriate representation of all the Member States, high quality and unbiased processes, and the possibility to call back decisions that are not considered of an appropriate standard.
In a speech at the BBA’s conference Stephen Majjoor of ESMA said this:
I want to emphasise that for large parts of the financial markets the distinction between Eurozone and non-Eurozone member states has very limited relevance. For example, market infrastructures, investment firms, and investment funds span the Eurozone and the non-Eurozone and in all the directives, regulations, technical standards and guidance that are within ESMA’s scope, the Eurozone/non-Eurozone distinction hardly ever plays a role.
In other words, the rationales for developing a single rule book, consistent supervision and a single securities market are not affected by the integration of the Eurozone. We should remain focused on the economic benefits of the single market in securities for all 27 member states and jointly continue our important work of achieving a single rule book and a consistent approach to supervision.
These ideas of having technical experts make the rules and emphasizing the single-rule book seem designed to appeal to financial institutions based outside the eurozone, suggesting that they might benefit from going along with the European Banking Union/Single Supervisory Mechanism. But the broad brush rhetoric runs up against concern about the details (see, for example this report prepared for the International Regulatory Strategy Group of the City of London by Anita Millar).
Update: In report published today the UK’s House of Commons European Scrutiny Committee (focusing on the EU proposals about the EBA/SSM and on the UK Government’s reaction (described in the report)) wrote:
there is potential for harm to UK interests, particularly in relation to the single market. So we presume the Prime Minister will be cautious in expressing any support during the forthcoming European Council for the elements outlined in the report…As for the role of national parliaments in ensuring democratic legitimacy and accountability we are concerned: at the implications of the apparent presumption in the report about the primacy of the European Parliament; and the presumption that democratic legitimacy and accountability of a new strengthened EMU framework and cooperation under Article 13 of the SCG treaty should only be explored within the context of the European Semester.
We remind all concerned in this debate that national parliaments are representative of sovereign states. Incidentally, we note the rather odd phraseology — “we can use†— the Minister deploys. We presume he does not actually mean that governments use parliaments… These matters are of high importance for the UK…we recommend ..[a debate] for three hours on the Floor of the House..In making this debate recommendation we note, notwithstanding the Minister’s comments, that the document will not be cleared from scrutiny until the debate takes place and take the view that actions by the Government which amounted to agreement of the report would be a serious breach of the scrutiny reserve.
the future of eu banking supervision October 10, 2012
Posted by Bradley in : financial regulation , add a commentWhat will the European Banking Union look like (if it gets off the ground)? Andrea Enria of the EBA spoke to the European Parliament. He intimated that the Single Supervisory Mechanism could involve delegation by the ECB of “operational conduct of day-to-day supervisory oversight” to national authorities. He suggested that the problems of thinking about adjusting the voting mechanisms in the EBA Board of Supervisors (this is the problem of how to allocate voting between the euro and non-euro area states) should be resolved by moving away from country representation:
While I understand these concerns, I am very worried that the solution could simply raise the required votes for approving a proposal, coming very close to a unanimity principle. Our ability to decide could be seriously hampered. I would suggest that new mechanisms for decision making be considered, which are less based on country representation and country weights. After all, the EBA is requested to make technical decisions that work for the Single Market, not to craft compromises amongst representatives from Member States. The mechanisms of independent panels and reverse majority voting proposed by the Commission for decisions on cases of breach of law and mediation could possibly be adapted and applied also in our standard setting function.
While this approach (if the Member States could agree on it) could get past the euro-area/ non-euro-area issues, I’m not a great fan of the idea that financial regulation is merely technical and should therefore be developed by groups of experts.
how to use fines for financial misconduct October 8, 2012
Posted by Bradley in : financial regulation , add a commentThe UK plans to change the rules so that fines for financial misconduct benefit the armed forces through the Armed Forces Covenant:
The additional funding can be made available in 2012-13 due to amendments which will be brought forward to the Financial Services Bill later this year. The amendments will mean that, in future, regulatory fines revenue in excess of enforcement case costs for the year will go to the Exchequer.
And the monies involved include the Barclays Libor fine.
I can understand why the Treasury would think that fines should contribute to the general welfare rater than reducing licensing fees for the financial industry. I don’t see quite why the Treasury wants to link financial misconduct to supporting people who have served their country in this way. Do they think that the financial regulators will act more aggressively in enforcement to benefit veterans? Surely not. And linking help for the armed services to what must be a quantitatively unpredictable source of funds seems odd to me.
new eu consultation on a possible framework for the recovery and resolution of nonbank financial institutions October 5, 2012
Posted by Bradley in : financial regulation , add a commentThe Commission has published a consultation document asking for views on the recovery and resolution of nonbank financial institutions with comments due by December 28th. The target group for the consultation is defined broadly as:
Member State authorities (crisis management, supervisory, judicial), financial industry, their stakeholders (customers, creditors, shareholders, employees), trade associations, academia, citizens.
It’s not entirely clear to me why the target group here (stakeholders) is defined so broadly when the financial indices consultation’s target group was defined in a way that looks (but arguably isn’t really because of the broad scope of the term “users”) narrower. In a context where the underlying problems – issues relating to the manipulation of Libor and other benchmarks- had received a significant amount of news coverage, the Commission defined the target group of the consultation as
Contributors to, providers of and users of indices and benchmarks
I’m not sure what principles (if any) are operating here with respect to stakeholder definition.
high level committee: publication of responses to first consultation, second consultation October 3, 2012
Posted by Bradley in : consultation, financial regulation , add a commentThe responses to the first consultation carried out by the High-level Expert Group on reforming the structure of the EU banking sector are here. And there’s a new consultation based on the High Level Expert Group’s Report. Comments are due November 13th.
high level experts agree on separation of trading from banking October 2, 2012
Posted by Bradley in : financial regulation, transparency , add a commentThe Report of the High-level Expert Group on reforming the structure of the EU banking sector is out. The Report states:
We organised hearings with a large number of stakeholders who represented providers of banking services, consumers of such services, investors in banks, policymakers and academics. The Group has furthermore held a public consultation of stakeholders, the responses to which are published together with this report.
But the report does not give details of any of the hearings. And, as of this morning, responses to the Consultation are still not available at the consultation page, nor is there a link to responses from the press release. There is a long bibliography at the back of the Report and many citations to academic literature throughout.
Here’s the conclusion of the Report:
The Group´s conclusion is that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group.
The central objectives of the separation are to make banking groups, especially their socially most vital parts (mainly deposit-taking and providing financial services to the non-financial sectors in the economy), safer and less connected to high-risk trading activities and to limit the implicit or explicit stake of taxpayer in the trading parts of banking groups. The Group’s recommendations regarding separation concern businesses which are considered to represent the riskiest parts of trading activities and where risk positions can change most rapidly.
There are five recommendations: separation of risky business from deposit-taking, a requirement for banks to have effective and realistic recovery and resolution plans, the use of designated bail-in instruments (to be held outside the banking system), more robust risk weights in the determination of minimum capital standards and more consistent treatment of risk in internal models, and corporate governance reforms. There’s some more detail in the report about how to ensure the insulation of the deposit-taking part of a bank from proprietary trading, but there are some questions. For example:
The use of derivatives for own asset and liability management purposes, as well as sales and purchases of assets to manage the assets in the liquidity portfolio, would also be permitted for deposit banks.
The authors of the report are limited in what they can recommend by the need to allow for the continued existence of universal banking in the EU, and by the idea that the proposals had to be sufficiently simple to be able to be implemented throughout the EU. The Group endorses the Commission’s European Banking Union proposals and states that its own proposals for the single market “can help the establishment of a banking union.”
It’s not clear what will happen to the recommendations. They aren’t evidently either very politically nuanced, or drafted with the sort of detail lawyers like (and we know how complicated the details of separating out proprietary trading from banking are in the US (the authors of the Liikanen Report seem to think the Volcker rules are in place as of July 2012 but if this is what they think they are mistaken)).
michel barnier critiques basel peer review October 1, 2012
Posted by Bradley in : financial regulation , add a commentThe Basel Committee has published assessments of the levels of compliance of the EU, Japan, and the US with Basel III. The reports are characterized as preliminary assessments. Nevertheless, Michel Barnier had some problems with the EU report:
In 12 out of 14 areas of the preliminary “Regulatory Consistency Assessment” concerning the EU published by the Basel Committee today, the draft European legislation has been fairly assessed to be “compliant” or “largely compliant”. I have, however, reservations about the preliminary findings in the remaining two areas, which do not appear to be supported by rigorous evidence and a well-defined methodology. I believe that this has led to an apparently significant lack of consistency in the way judgement and gradings have, in this preliminary phase, been applied in those two areas across jurisdictions. The European Commission and the European members of the Basel Committee have provided extensive information and clarifications to the Basel Committee during the process, but unfortunately this has only been partially reflected in this present preliminary report. Here at the Commission, we stand ready to support the further work by the Basel Committee to improve its assessment of standards implementation and are confident that the final report of the Basel Committee will constitute an improvement both in the assessment of the EU and in the coherence across jurisdictions.
There is more detail in the press release. As this sort of peer review process is becoming a more visible component of the transnational standards process (I am working on a paper on this topic focusing on the FSB’s peer reviews) the questions Barnier raises about methodology are important.
how to facilitate international co-ordination of financial regulation September 29, 2012
Posted by Bradley in : financial regulation , add a commentFrom a recent speech by Robert Jenkins of the Bank of England’s Financial Policy Committee with the title A debate framed by fallacies:
global regulators would have less to argue about if there were fewer rules to coordinate and fewer regulations to enforce.