Tuesday, 17 July 2018

Dispatches from Washington

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IFR editor-at-large Keith Mullin reports from the US on regulatory rumblings and capital markets musings.

I took a day trip to Washington from London this past weekend to moderate an early-morning seminar on India’s Path to Sustainable Growth on the sidelines of the IMF/World Bank annual meetings. As usual, the US capital was packed with the usual hubbub and succession of motorcades; the longer, more impressive and glitzy the motorcade, the poorer the country, according to my taxi driver. 

They were building the inauguration platform for the new US president outside the Capitol Building as I went by; the half-finished wooden scaffolding looked just like one of those medieval gantries they used to put up for public hangings in Europe. If only… 

The mood in the lead-up to the meetings had been pretty downbeat and the themes were predictably depressing: low and uneven growth, slowdown in trade and investment, the fate of globalisation amid the bias towards de-globalisation, lack of inclusive capitalism, inequality, rising discontent and the rise of political radicalism, unemployment, geopolitical conflict, migration, lower commodity prices, medium-term financial risks, technology and managing the economic transition to digitisation. 

Those well-worn topics may have formed the narrative for the plenary sessions but around the fringes the single most discussed topic that I could glean in the short time I was there was the fate of Deutsche Bank … seriously. I bumped into the CEO of a small bank headquartered on an island in the Indian Ocean and DB gossip was his opening gambit. 

Morbid interest in DB was followed in short order by intrigue around Brexit. Given the comments made by Jamie Dimon, James Gorman, Bill Winters and other banking statesmen at the Institute of International Finance members meeting, that’s hardly surprising. Coming a close third among conversation topics was whether we were headed for another global financial crisis and if so, what would be its catalyst. Frankly, this latter bunch of topics made for far more interesting cocktail party chatter than the erudite snore-fest above. 

EC banking agenda

On the financial crisis topic, global regulators were in town in force. William Coen gave an update on Basel Committee priorities at the IIF and European Commission vice president Valdis Dombrovskis unloaded his agenda priorities at the Peterson Institute. I didn’t attend their sessions but reading through their speeches, I was struck by three things: they’re still going hell for leather to complete their closing-the-stable-door-after-the-horse-has-bolted reform packages, there’s a hell of lot still to do, but there’s a lot of stuff tabled between now and year-end. 

Dombrovskis name-checked a whole bunch of EC initiatives. Nothing really new emerged on a capital markets union though there are some things worth looking out for. I’ll be keen to see how the EC extends the prudential regime for insurers making it cheaper for them to invest in infrastructure companies, building on amendments already drafted around investment in projects. 

I’ll also follow with interest progress on plans to reform insolvency regimes across Europe. This is a big one. A proposal is due out in the next few weeks detailing effective arrangements for restructuring viable business debt, while in parallel the commission is encouraging EU countries to tackle NPLs. “Meaningful and co-ordinated action to clean up NPLs is a priority,” Dombrovskis said. I’ll also be looking out for steps towards the reform of tax regimes to make them more equity and investment friendly. 

On a CMU-related matter, I saw that eight European trade associations published a paper on Monday to push the cause of securitisation. “The importance of securitisation for jobs and growth in Europe” (the title’s bit of a stretch if you ask me) came ahead of a scheduled European Parliament meeting on Tuesday where MEPs were set to discuss proposed amendments to the draft Simple, Transparent and Standardised (STS) securitisation regulation. I guess lobbying is lobbying. 

Elsewhere, in the quest to deliver a genuine single market for retail financial services, Dombrovskis mentioned that the EC has tabled a set of actions to improve the single market in insurance, pensions, loans, and current or savings accounts. Central to this will be fintech and digital innovation. 

Before the end of the year, we also can expect revisions to the capital requirements regulation and directive with the aim of bringing in legislation that supports financial stability but which allows banks to lend and support investment in the wider economy. Good luck. Achieving any of that with the baggage of negative interest rates and crushing regulation will be a fascinating spectacle (or do I mean debacle?). 

On implementing international standards for G-SIBs, Dombrovskis said the EC will be out soon with proposals to implement TLAC “and ensure it can fit intelligently with MREL”. Pointing to work being done on TLAC in the US, he added: “we hope this can be done in a way which takes into account the situation of foreign banks operating in the US. It is important to maintain a level playing field across both jurisdictions”. Wishful thinking. Nice try. 

On the vexed issue of unintended consequences, something to look out for is more detail that’s coming by year-end on whether legislation passed during the crisis is working as intended and whether it is growth friendly. (Big clue: it isn’t). “We need to look at whether we can make legislation more proportionate. And see whether the compliance burden can be reduced for businesses,” Dombrovskis said. Indeed. 

The Investment Plan for Europe got a good mention: €127bn in investments raised in the first year of operation and plans to increase public and private investment from the initial target of €315bn to €500bn by 2020. Sustainable finance and investment got a decent look-in, with Dombrovskis calling on institutional investors to develop more sustainable investment policies to support the transition to a low-carbon economy. He wants 40% of the European Fund for Strategic Investment to support sustainable growth projects. 

BCBS priorities

William Coen, secretary general of the Basel Committee, similarly updated us on work to finalise the global regulatory framework. He said the committee’s goal is to finish post-crisis reforms by the end of this year, providing “clarity and certainty to supervisors and market participants”. (Note to Coen: you forgot the pain bit). 

The bulk of outstanding reforms relate to the fight against internal models and reducing what he called “excessive variability in risk-weighted assets”. Outstanding reforms will support the committee’s objective to restore the credibility of the risk-based capital framework. “This is not an exercise in increasing regulatory capital requirements, although I do not rule this out as a possible outcome for outlier banks”, he warned. 

Bearing in mind the punch-up that developed in Luxembourg yesterday among EU ministers between those supporting the global standards that the Basel Committee is developing and the EU bloc-approach that Dombrovskis is backing, I would have paid good money to watch Coen and Dombrovskis on the same Washington stage engaged in hand-to-hand combat for the rights to regulatory supremacy… 

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