Monday, 21 May 2012

Latest on long saga of Bank Reform...

If there was a prize of the biggest bore in Britain or Brussels I should probably enter. Friends who have been loyal enough to drag me out of the office for dinner or a drink over the past two years have listened to me yakking on about negotiations in the bank Capital Requirement Directive, CRD 4. Last Monday we finally got to a vote.

This dates back to the collapse of Lehmans and Northern Rock and to subsequent announcements of global leaders. Tucked in the back of a G20 communique from 2009 was a statement that banks in the future would hold far higher level capital (to help withstand losses) and liquidity (so that they have cash on hand to meet withdrawals) both backstopped by an overall test on leverage and stronger corporate governance.

Detailed work on delivering those ambitions has been happening with bank supervisors from across the globe at the Basel Committee. US legislators made their first steps to introduce part of this in the 2010 Dodd Frank bill. CRD 4 is Europe’s legislative effort. Whilst there are many places where the EU makes un-necessary laws, having international agreements on international banks is needed and Europe is just one of the places where we need to make those agreements.

 The G20 statement was just two paragraphs, the reality is much more complicated. Last summer the Commission published its first draft of the new laws; a 150 page Directive plus another 500 page Regulation in three volumes. This covers a plethora of different banking services and is also set against the backdrop of our weak economic outlook, a credit crunch exacerbated by de-leveraging and banks still teetering on the edge in certain European countries - as demonstrated by last weeks bailout of the Spanish “Bankia”.

In February, MEPs submitted over 2,000 amendments to the Commissions text. I admit that nearly 200 of those came from me, another 200 from British Lib Dem Sharon Bowles, Conservative Ashley Fox helpfully focused 70 amendments on corporate governance issues. When the European Parliament is faced with such a mountain of amendments lead negotiators from each political group meet to see if they can haggle out some agreements. Othmar Karas (Austrian Centre Right) was “the Rapporteur” backed by Shadows, Udo Bulmann (German Socialist), Sharon Bowles (UK Liberal), Philippe Lamberts (Belgian Green) and me for the European Conservatives and Reformists. 170 compromise amendments were then tabled with another hundred plus amendments put to the Committee vote on Monday evening. Opinions differed on various details but at the end of a 3 hour voting session the Parliament now has a new draft of the text, which MEPs unanimously agreed to take into the next stage of negotiations. So who should be happy with the new amended text and who should be concerned?

Those who should be Happy
Small and Medium sized businesses who pushed hard for weighted incentives for banks making loans to these companies. The incentives are now there. Will they work?
Tax Payers who with more robust capital and liquidity will find banks less likely to fail. Also, thanks to amendments by Sharon Bowles, banks will have to provide “living wills” so if there is a collapse regulators can ring fence off critical parts of the banks. We passed amendments drafted by the FSA, tabled by me, which will allow conversion of subordinated debt before tax payer’s commit funds (a key and very expensive lesson for UK tax payers from the RBS bailout).
The Queen, or at least the PM and Chancellor for the Queen's Speech. A key part of the Queen’s speech was the UK’s proposal to ring fence retail from investment banking, but this legislation could have prevented that. Whereas an EU Directive allows a country to introduce stronger rules when it brings in its domestic legislation an EU Regulation does not. We often complain about “gold plating” but sometimes we also need it. The right for the UK to put stronger rules on its banks was one of David Cameron’s key reasons for vetoing the EU treaty last year, and whilst many Conservatives were involved in last minute eve-of-poll plans for the local elections this month, George Osborne left a Brussels negotiating table at 1.30 am refusing to sign up to the Council’s amended draft of the legislation which would have left him without these powers.
Companies with international trade links as part of the original text would have had a disproportionate negative impact on trade finance.
The CBI and larger industrial corporates who use hedging tools to mitigate true businesses risks like foreign exchange, interest rate and commodity price exposures.
Mortgage holders struggling with their repayments as the original draft would have forced banks to start to consider repossessions after 90 days of delayed payments whereas many homeowners suffering temporary cash crises can get back onto a new schedule to keep their homes and pay their lenders.
Infrastructure projects which are so critical to our long term growth. MEPs supported my amendment to give banks extra incentives to lend to these.
The UK’s Co-operative bank which not actually a co-operative but is a subsidiary of a co-operative but will now be treated as a co-operative. Small point but very important to them and we should support Co-ops and mutuals.
British Banks who have, on the whole, already complied with the higher capital and liquidity requirements of Basel do want to see a level playing field with their international competitors. Leveling up the playing field with European banks is only part of the global jigsaw, but it is at least a start.
UK Building Societies which can’t issue new shares as they don’t have “shareholders” but will be able to build up capital with alternative share like instruments.
Shareholders and Depositors who will start to see greater transparency on the activities of their banks. For example, internal models which have caused so much chaos will now need to be benchmarked against those of peers. The financial crisis started in the US mortgage securitisation market so one of my concerns is the rise in secured debt being issued by European banks through covered bonds. There should now be greater transparency and a full review of the covered bond markets.
And who do should still be Concerned
Shareholders of certain continental European banks who have negotiated special exemptions. Especially of certain bank/insurer groups which have a negotiated a different model for calculating capital from the Basel norm. Their share prices are still trading at near all time lows. My amendments for greater transparency on these were not passed. Some other continental banks are still hoping their national regulators will allow them to continue to issue weaker forms of capital. Both of these issues undermine the global agreement and Europe’s so called level playing field but I suspect shareholders worries may become a stronger force for change.
Mervyn King, other Central Bankers and Regulators who have been issuing warnings to European politicians about new potential systemic risks, but many European politicians have, yet again, been having deaf ears. For example, central bankers wanted national regulators to be able to go further than EU minimums but boy was this a fight with federalist MEPs. MEPs did not listen to specific concerns they raised about parts of the covered bond market in certain countries. Following last weeks Spanish bailout Central Bankers should also be concerned as to whether supervisors are ready and able to prevent and resolve future problems.
Shadow Banking those involved in large “repo” transactions will now need to have much greater transparency. Their concerns should be a good thing for the rest of us and this especially affects how the European Central Bank is going to get out of being the lender of last resort to so many banks across Europe.
Asset managers as some of their amendments to recognise the differences between banks and investment managers were not passed. This could be extremely costly for investors. I hope we can get this changed in the next level of negotiations.
Those still taking very large bonuses who have been sent a very firm message by colleagues who voted for a 1 to 1 cap on bonus to salary. Like many, I don’t have much sympathy for their concern but there is a risk that this cap will just push up salaries making banks even less robust during downturns. Therefore, I proposed a last minute amendment to give the capping powers to shareholders at AGMs, but this did not get through the Parliament. This suggestion has however been picked up by Commissioner Barnier (with whom I so often disagree) in the front page of yesterday’s FT. Perhaps we will see the UK’s Shareholder Spring moving across the Continent.

Actually we should all be concerned, whilst personally I can put a mountain of paper in my recycling bin this is not over. These are still far from global agreements but they affect global players, and as we all learnt from Lehmans and RBS those global players affect our personal economic futures. The UK redlines to be able to take our own protections from future failures have been met in both the Parliament and Council versions of the text but the final agreement is far from over as now Parliament, Council and Commission will meet in Trialogue for more detailed negotiations. The concerns of real businesses large and small have largely been included but will this be enough to get the balance between safer banks and the credit crunch restored, this is critical to growth. Are the risks which we found in our banking systems now being transferred to less regulated sectors. In the meantime the single market is still far from a transparent level playing field. And most pressingly the crisis remains in the Eurozone with the ECB continuing to provide a Euro-taxpayer-costly lifeline for many Eurozone banks. I suspect I will be boring on about banks for a while yet.

PS for anyone who is interested. UKIP MEPs could have been represented in the negotiations but have never sent a representative. They tabled zero amendments. Their one member of the committee also failed to turn up to the vote on Monday. Many amendments were passed by just one vote.

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