IFR Bank Capital Roundtable 2015: Part 3

IFR: Taking that G-SIB/D-SIB point and the differences between them; and thinking beyond that broadly about banks’ strategy efforts, there seems to be a lot of high-level strategic conversation out there about whether banks can and should change their strategies or the shape of their groups to create ratings uplift or to change capital and resolution requirements by shrinking below, for example, the G-SIB barrier.

Not to single anyone out per se but I’m thinking about the differences between the likes of, say, UniCredit and Banca Intesa here the fact that the former is a G-SIB while the latter isn’t with some key differences in treatment. Yet they’re operating side-by-side in their domestic market. To what extent do these kinds of conversations come up when you go out and talk to clients?

Paul Oates, UBS: There are two avenues of conversation we typically have with clients. On one side, there are a lot of questions about how ALAC within a group structure really works, whether it’s all sitting at the top and can be moved round and with debate between internal and external ALAC. S&P has provided some good clarity on that this week. I think Moody’s is wrestling with that problem at the moment, where they have taken a rather national approach to how they think resolution will work.

How does that apply to a multinational bank? Is the home regulator going to take control? How is it going to work with the host regulator, particularly when the bank is a leading player in their markets? It’s not really clear yet and I think Moody’s is having a lot of conversations like that with issuers at the moment to try and get that to work. I think S&P and Fitch are probably also having similar discussions, probably on a more pragmatic level as they’re not as prescriptive as Moody’s has been.

The other side is more about ring-fencing for example, where individual parts of groups that maybe have to be rated on a stand-alone basis and the group support they get from the overall group credit profile is not as strong as it used to be because there is regulatory influence.

It’s something that’s happening at the moment where some banks are setting up retail and commercial arms for their national business. Once these are created, how does a rating of that arm come out versus the investment-banking arm? How do they relate and, if you are restricted on how you can move capital and liquidity between these two entities, how can they both benefit from being part of the same group while the agencies are able to assess the different likelihoods of support for each different arm?

Steven Penketh, Barclays: There’s a very interesting question within that terminology ‘ratings’. Is it plural? What are you actually rating? Going back to the point that was raised earlier about different international resolution regimes and having to understand each of them. We’ve seen Moody’s come out and make some statements around the fact that they’re going to assess different aspects of the liability stack inside a bank; looking at excluded liabilities, derivative positions, whatever it may be that would actually have seniority over bail-inable debt.

I don’t think S&P has done that yet but I’d be very interested to know from Michelle whether, as everything evolves, you see it as almost unavoidable that you are going to have to allocate myriad different ratings to different aspects of a liability stack of a particular banking institution because it has a fundamental impact on the way in which those banks can then do business and write business in different asset and liability sets.

Michelle Brennan, S&P: This is a really important point: what does a rating talk to and how is it defined? There are differences in rating definitions from different agencies but when you think about an ICR from S&P, this is looking at the likelihood of default, including timely payment on a senior unsecured bond.

We’ve never had ratings on deposits, so deposits are not part of the ALAC impact. Historically, there haven’t been ratings on derivatives. If we think, going back from when I started in the market, the standard of derivative documentation might not necessarily have been consistent with the process of assigning a rating, and there would have been a lot less consistency as well in terms of the structures of certain types of derivatives.

We’re seeing a lot of interesting trends in the market in terms of regulatory encouragements of various types of derivative transaction formats; we believe there have been big improvements in terms of documentation and record-keeping within entities over the last couple of years. But if we look at the whole idea of: “are derivatives exempt liabilities?” the BRRD still provides for a degree of uncertainty.

We know more or less what the resolution authorities want to do at a high level, but it’s not necessarily as clear as to what exactly all the outcomes will be for all liabilities. It’s quite interesting to look at the German legislation, which of course at the moment is still a draft; and we can’t predict exactly what the final version will look like. But if implemented in the draft format, it definitely provides for more certainty around the treatment of certain types of derivatives, and more certainty than you would have within the BRRD.

Gerald Podobnik, Deutsche Bank: It’s worth spending a couple of minutes on the German law proposal because people need to understand that what Germany is trying to do here is make the BRRD, in a German context, workable in practice. This is the whole idea behind it but it has implications on various things.

The draft, which is the implementation of the SRM into German law, changed its name to from SRM-Anpassungsgesetz to Abwicklungsmechanismusgesetz. It’s a lot more than just the subordination of plain vanilla senior creditors. For example, there is also the requirement for German banks to have language in financial contracts written under foreign law, including derivatives, to have clauses that recognise the power of the European Resolution Authority for temporary stays and so on, so it is a very broad act.

What was reassuring for me, personally, is that the comments we received on the proposal from around the world were supportive and very constructive. I think it’s a good sign that the debate has moved on when it comes to real details from a superficial “this is big news” to really looking at what’s on the table and understanding what they are trying to achieve.

I think it will be a very good blueprint for other countries because it’s the first real attempt to define certain elements. There is a definition in there of structured notes, for example, which we haven’t seen so far on a global scale so it’s the first time a legislative body had tried legalistically to map out some of those details.

Khalid Krim, Morgan Stanley: What we’re seeing is debate evolve around the question of whether we need a change to the BRRD to achieve what we’re trying to achieve in a European framework. The fact that everyone has acknowledged that in a European context the TLAC proposal or the MREL changes will need to be adapted to the way European banks are organised isn’t a surprise; I think it was something people, wherever they come from, have been asking for. Making sure that we have some form of harmonisation even within Europe and this doesn’t happen only in Germany will be key.

Daniel Shore, HSBC: Indeed: the BRRD didn’t expect the Germans to do this; nobody anticipated somebody changing the law suddenly to clear that out overnight.

Khalid Krim, Morgan Stanley: I agree with you; people were thinking more about BRRD 2, which came out before the TLAC proposal, so I think you can argue that there was a regulatory agenda. Ultimately what we are getting is a simple clarification about the waterfall and where everyone ranks. In simple terms, that’s what we are achieving.

Steven Penketh, Barclays: The whole concept of statutory bail-in was supposed to fix for retrospective application so you didn’t end up with marginal costs or transitional issues that caused everybody a headache. Unfortunately, in tandem with implementing statutory bail in, a number of qualifications crept in – no creditor worse off etc – that diluted the value of the statutory clause. The German proposition that changes insolvency law is just a way of correcting this.

I think that most people have agreed that the principle is right; it seems very sensible on the face of it. I would echo what Khalid says about harmonisation however; that could be impacted negatively if you have a very large banking jurisdiction that introduces it and then you have other jurisdictions that don’t follow suit. The latter may be faced with having to introduce changes to the creditor hierarchies on a marginal basis through public market execution, so you end up with splintering, jurisdictional arbitrage and an un-level playing field. It’s going to be interesting to see what happens here.

Daniel Shore, HSBC: That rolls onto how you work out the relative value of the instruments. We’re in an abnormal environment with low interest rates etc but it would be interesting to see, if we’re trying to issue Tier 1, senior, covereds, what would happen if rates were 400bp higher and there was no ECB involvement. You have to do so much more credit work to try and evaluate what the relative value is.

We’ve already said that the spreads are very close but how do you deal, first of all, with credit? How do you deal with country and resolution regimes where if it’s not done through law, it’s done through the BRRD route? Does it mean that you get more fragmentation?

We’re trying to harmonise bank capital structures and liquidity structures and how they’re dealt with in resolution. That should help how we evaluate credit because it should simplify it. If it doesn’t go down that route. it’s only going to complicate issues for investors in the market and how you market your product.

Sandeep Agarwal, Credit Suisse: I do agree with these comments and it raises the question of harmonisation very clearly in my mind. I think it is difficult to harmonise. The Germans may find it easier to go down the path of subordinating senior debt because their deposit funding structure is such that the senior unsecured class is smaller than if you take, for example, a UniCredit which has sent a lot of its senior unsecured into the retail network.

So when loss imposition really happens, can a UniCredit implement that with equal amount of severity than a German can? I would argue not; it is difficult. When you have pension fund structures in Netherlands, France, or Australia that take away a lot of savings, you have holes in funding stacks which are very big .

At that point in time, you create what Daniel was starting to point to: if ratings agencies look at the losses and take down their senior unsecured ratings by two notches, then you have the whole funding stack widening out by a significant amount. This does raise the question about harmonisation and whether it is possible to harmonise when the structure of economies is very different.

Khalid Krim, Morgan Stanley: I would say that harmonisation is step one. Step two is strategy. What is it that you are doing as a bank to communicate to your creditors and to your depositors that there is an adequate bail-in buffer protecting them? I don’t think that the German banks, or even the French banks or the others, will stop there; they know that from a statutory standpoint they have a solution that works and they don’t need to go with their holding company and so on.

Step two is: “OK, now that I have a workable solution, what is my communication to my creditors about the capital stack?” I can tell them: “this is the TLAC requirement, the MREL requirement and how much is protecting you in Tier 1, Tier 2, or Tier 3”. They think that there is a need to create a cheaper form to protect and buffer up senior creditors, but I think, if we go step-by-step, it’s positive to say that the first step is workable and actionable from all the resolution authorities.

Steven Penketh, Barclays: There are some very interesting nuances coming out of this, though. When you think about the MREL term sheet and the different criteria that would be considered when it comes to calibration, one of those is resolvability. Resolvability is fundamentally the ability to exercise resolution powers on a bank failure.

Just having a sledgehammer in the context of subordination through statute doesn’t necessarily make a bank resolvable because disposing of entities or segregating the assets and liabilities on the balance sheet post-failure can be more complicated than that. Structural shifts have been discussed in that light, giving rise to talk about holding company ‘single-point-of-entry’ resolution structures etc (whether it’s the UK, Switzerland or in the US – the latter being effectively already there). This is supposed to facilitate efficiency in resolution planning. The TLAC Quantitative Impact Study should make interesting reading in that regard.

There are – and there should be – structural or capital and MREL rewards for structural efficiencies that are brought in through these structures. That’s what you would hope (from an EU perspective) the MREL resolution process is trying to get to. Bail-in powers are one way to say: “you will potentially lose your shirt if you are a senior unsecured term debt holder” but the actual resolvability of the institution isn’t addressed through bail-in alone. That’s what you need to think about when you’re issuing as well: what are you trying to achieve structurally and are you ‘future-proofing’ for your target end state.

Gerald Podobnik, Deutsche Bank: That’s why it’s important to start to get clarity soon about what the resolution plans that are written up for various banks in Europe will look like and which resolution strategies they should follow. The MREL setting system, when it’s done operationally towards the second half of this year, should help in that respect because there is still a lot of guessing around how things are going to end up.

There will be a lot more incentives for banks to look at the way they are set up in terms of resolvability, so I completely agree with you on that one, while they are getting a bit more feedback from the resolution authority on the overall direction of travel.

Khalid Krim, Morgan Stanley: The issue in Europe is that we still have to deal with recently-created resolution authorities at the national level and at the European level, which contrasts to what we have in the US where we know that the FDIC and the Fed have spent a lot of time with US banks. I’m not saying that US banks are better, but if you look at what happened in August 2014, for instance, US banks had a message from the FDIC saying that they didn’t deem the resolution plans adequate.

All the banks are working with their resolution authorities to upgrade existing resolution plans, to make sure they have better disclosure even to the resolution authority – and hence to the market – about the resolvability of the end-solution. I don’t think that there is a competitive advantage for US banks, but we need to see banks and resolution authorities spending time together to make banks more resolvable and communicate that to the market.

IFR: Coming back on one of the points that was raised earlier on calibration of RWAs, I’m thinking about the work that the Basel Committee is doing on that topic and wonder how much of a game changer that’s going to be for banks, whether it’s going to move the needle on capital needs or what’s going to happen there.

Michelle Brennan, S&P: I’ll kick off in terms of the ALAC criteria. Some of the discussions we’ve had today have indicated why we weren’t able to just use regulatory loss-absorbing capacity as the numerator that would be consistent for banks globally. It’s not consistent yet and we really felt that we needed to have our own way of stepping back, looking at the various liabilities and saying: “do we think they represent loss-absorbing capacity?” The regulatory rules are not yet consistent enough to do that.

In the same way, we continue to use S&P RWA as our own metric for the denominator. There are differing views in the market about that; some people like it more than others. But what we have is something that’s consistent across entities globally. It may not represent the specific risk profile of a specific bank’s balance sheet, but we have ways to identify that departure and adjust for it, and you’ll see in the ALAC criteria how we’ve built in various qualitative adjustments to take account of that.

We do note that the improvements that we’re beginning to see in terms of consistency of RWA measures are giving us more comfort in terms of comparing some RWA regulatory measures across banks. But we’re still not quite there yet.

One of the things that came through very strongly as the market feedback as part of the ALAC RFC was: “why not use regulatory RWA as your denominator”? After all, the regulator’s decision as to when to intervene in the bank will be based on regulatory measures, and their decision as to how much recapitalisation might be required through a resolution is also based on regulatory capital measures as well. It would have been nice to be able to do that, but we still felt that the regulatory RWAs aren’t consistent enough.

If we look at all the examples of resolution-style events, the regulatory RWAs have been particularly volatile. You could say: “they’re all tail events; they’re all quite unusual banks, they’ve all got their idiosyncratic features” but often those types of distresses are going to have those unusual and more tail-oriented aspects.

So, S&P RWA are still there. Are we open to the idea of seeing regulatory RWAs become more consistent in the future and something that we feel we could have consistent ratings based on? Yes, but we’re not quite there yet.

Gerald Podobnik, Deutsche Bank: This is my favourite topic these days. In Europe, it could have a substantial impact. When you listen to Danièle Nouy (Chair of the Supervisory Board of the SSM) and Sabine Lautenschläger (member of the Executive Board of the ECB) talking on the topic, they are quite vocal on the need for reform of RWA calculation. It’s a global project so we can look at it from a global perspective.

For Europe the impact, depending on the outcome calibration, could be substantial. Could be; but does not need to be. I think in the US it will be less so because they already have capital floors in place. The Collins floor for large US banks under the Dodd-Frank Act is a 100% floor based on the standardised approach. Also, Dodd-Frank has got rid of ratings in their standardised approach, so they are little bit more advanced on the topic. In Asia overall usage, generally, of internal models is not so widespread. But for Europe this could be something that keeps us awake over the next couple of years.

Sandeep Agarwal, Credit Suisse: I completely agree. This is probably the biggest delta-mover because we have all been talking about the numerators so far. But this brings two sets of dilemmas. First of all, we are not recognising that the economic structure of the European banking sector is different than the US.

For example, you have mortgages financed by the banking sector in Europe unlike the US, and the loss experience between a jurisdiction say Nordics versus Southern Europe or the crisis-hit sub-primes has been different. IRB models recognise that, so we are out of some level of laziness by the regulators, wanting to throw this away and change the fundamental pricing dynamics that will be required to support those businesses. That’s a big issue.

The second issue is that a lot of jurisdictions have now implemented capital regulations recognising this IRB differential. For example, the Nordics have undertaken a 19% CET1 requirement, with an 8% trigger instrument. If you harmonise the RWA, you will need to change the capital regulations again to be able to reflect that new denominator.

If RWA change occurs, which I think will, you are going to start entering a period of uncertainty around regulations again.

On the other hand, FRTB (Fundamental Review of the Trading Book) is a good thing to do, because trading books were key driver to capital falls during the crisis, and they are one of the reasons why we question the European bank’s quantum of capital, irrespective of the ratios (versus US or Asian banks).

These are the two things I worry about: that it does not recognise the economic structures the banks operate in and that it will lead to a lot more capital changes again .

Gerald Podobnik, Deutsche Bank: That’s why I said earlier it’s vital that for calibration decisions that this is taken into account, whether it’s TLAC, whether it’s leverage ratio, the whole Basel IV package has to be taken into account.

Daniel Shore, HSBC: Taking the example of the Nordic region, they generally have very well capitalised banks but with the new RWA thought process coming in, it could theoretically halve the capital ratios of the strongest banks. I know it could be phased in, but by the same token, they would have to go and raise more capital. How does that then work on the relative value again? It just doesn’t make sense.

Laurent Frings, Aberdeen Asset Management: Which is interesting in the context of investors buying trigger instruments when that trigger can effectively be meaningless if your denominator, say, doubles overnight. People are still not really understanding the optionality they’re writing on some instruments. You are writing big options out there and you have no idea how they’ll play out.

Steven Penketh, Barclays: There’s a natural tendency for all market participants to want to raise a red flag at this stage and say: “can we just take a bit of time out?” You’ve had huge movement in risk-weight ratios and calibrations over the last three or four years anyway. You’ve introduced leverage backstops at the same time. So you’ve got two book-ends there that should work well enough.

Why are we trying to solve on a constant iterative basis for different shades of grey between those? I’m not sure. It’s very confusing for stakeholders who are taking spot decisions with a long term view. So, yes, I do think that we should think a little bit about the benefits of letting things settle. It will certainly help all participants in the planning process.

IFR: The trigger is interesting but we’ve not talked about coupon deferrals in AT1 instruments. We’ve seen the litigation and fines on banks coming left, right, and centre. Is this a topic that comes up? Is this something that worries you more than the trigger?

Laurent Frings, Aberdeen Asset Management: Absolutely. Ultimately it’s very clear that you effectively have three big risks: coupon deferral, trigger and extension risk. You can take a view on all of those. The market has moved a lot over the last 12 months or so to focus on the biggest risk: coupon deferral.

When it comes to the AT1s the coupon, the Maximum Distributable Amount (MDA) or amount of distributable reserves and all the other elements are very important. We, as investors, need to understand that. Going back to the optionality that you are giving to others, whether it’s the issuer or to the regulator, you need to price those properly.

Sandeep Agarwal, Credit Suisse: I think the worry around coupon deferral is a little mispriced. The differential we are paying between a PONV triggered Tier 2 versus a PONV and 5-1/8% triggered Tier 1 is over-rated at 300bp-350bp. There are a couple of dynamics that one should consider around this.

One is that banks are fundamentally leveraged entities and will always remain that way so will need to access the fixed-income markets. Therefore, coupon deferral is a big decision, similar to dividend stoppage that the equity market reacts quite violently to. Neither is an easy decision for the issuer, even though in tomorrow’s world the regulator might force the issue.

Second, when I think about Credit Suisse, employees are being compensated in the same sort of instruments so not only is there a market discipline from the fixed-income investor dependence, there is also a management incentive structure that is now aligned to both the equity and debt space. I know that Credit Suisse has done a lot of that: compensation changes with both fixed income and equity, and I think UBS has done some as well. I think this is a great discipline but one that is not equally priced in when differentiating the various banking groups #

Daniel Shore, HSBC: It’s clear what a breach of TLAC means at the moment but at the moment it’s not clear on what a breach of MREL means. That’s another thing for both issuers and investors to try and understand as we hopefully go through this harmonisation, especially TLAC and MREL: what does it truly mean for your investors and for you as an institution?

Khalid Krim, Morgan Stanley: It’s clearly a concept of Pillar 1 and Pillar 2. What type of Pillar 1 regulation is impacting your actions and ability to make payments out on dividends but also on Tier 1s, and then Pillar 2. Also on MREL, to your point, we don’t have guidance at the moment about the individual MREL requirements. The EBA has been out with a consultation and they’re waiting on the convergence of MREL and TLAC. But I think the number that will apply to each bank that will be required by the regulator in terms of MREL still needs to be disclosed to the bank but also to the market at some point. We should think about being transparent so that people understand what the binding factors are and what is affecting the banks.

Steven Penketh, Barclays: From a general perspective, the MREL draft Regulatory Technical Standard makes constant reference to the FSB TLAC rules and they talk about the fact that these two things should be going hand in glove

I’m not too concerned about there being a big gap between the two, but I do think there are some fundamental issues still to sort through, for example the conflation between capital and funding. At the moment, the way things are written, you could have a situation where you’ve got a 20% Common Equity Tier 1 ratio and you’ve topped it up with a little bit of senior funding; you have a liquidity stress generically in the marketplace and you’re in a mandatory distribution restriction zone, even though you’ve got 20% equity.

That’s a pretty absurd example to paint – whoever is actually running that capital stack should probably be fired – but whilst it might be reductio ad absurdium it’s still possible if the rules get written that way. There are much better ways to go about that from a TLAC perspective, which is just looking at your maturity ladder for financing and making sure that you disclose that to the Street so they can see what the maturity profile is of your TLAC stack and how you’re managing that.

Again, a lot of these things come back to just transparency, market common sense and relative pricing. It will be the determinant factor for different issuers as to whether they’re doing a good job on it or not.

Daniel Shore, HSBC: I agree. We’ve talked about direction of travel and you said you have no worries but MREL and the subordination to liabilities versus TLAC are slightly different. How do you deal with that when you’re trying to put your balance sheet together; there’s still uncertainty around that.

Steven Penketh, Barclays: There is, but because they say they will bring these things together and can form them in the right way, my expectation is that that will happen.

Khalid Krim, Morgan Stanley: I would agree with that. We expect convergence in this space, and that convergence is key as is disclosure about the amount and how much everyone is required to hold.

Steven Penketh, Barclays: The way I think about it is as a funnelling effect where you have regulatory capital being the most binding definition. TLAC is the next most binding definition and then MREL is a broader sub-set of that, which makes sense because ultimately what you’re talking about is still the ability for MREL to soak up tail risk events if it turns out that you even got the TLAC conundrum wrong for a particular institution. But that, obviously, is very unlikely to happen.

Michelle Brennan, S&P: Just to emphasise the whole issue around disclosure by banks with regard to loss-absorbing capacity, whether it’s specifics like the composition, the maturities and so on. I think that’s going to be very, very important and the market may want to help give more of an advantage towards the first movers in terms of quality of disclosure.

One of the things we’ll want to do is publish what we think the projected ALAC amounts are, and we want to be able to give a rationale for that and why we think it’s X rather than Y. We also want to be able to explain why for one bank a 7% ALAC ratio might be equivalent to the bank round the corner with a 9% or a 10% ratio.

Again, to be able to do that there’s a real advantage with disclosure. We can make general comments based on things we might be able to infer, but it’s much more persuasive to the market when we can flag the various elements that have been disclosed that help to identify why the headline ratios have different informational qualities across entities.

IFR: Bearing in mind that the IFR Bank Capital Conference is taking place in November and this conversation is a bit of a stepping stone towards that, I wanted to go around the table and ask what are the milestones and key agenda points between now and the end of the year on this subject.

Michelle Brennan, S&P: We have the ALAC criteria in place. They’re effective, so any rating committee on any bank now has to consider ALAC as potentially having a rating impact. In practice that rating impact becomes most influential when government support is very limited in the rating or not there at all, and that’s why I think the forthcoming government support reviews in various parts of Europe are very important markers to look at.

The outcome of those is still uncertain; we don’t know whether it’ll lead to re-classifications of governments’ tendency to support the banking system or not or whether it will lead to changes in the classification of specific banks’ systemic importance. That’s a big issue to look at.

And while we don’t expect to be carrying out that type of review more broadly in Continental Europe within the next six months, we’ve also flagged that there will still be a pace of change that may lead to reviews, particularly moving into 2016.

There may be some exceptions; so, for example, there are some countries where maybe some of the BRRD implementation timetable may be accelerated. That’s going to be quite an important thing to track because if you do get to a situation where countries are much more uncertain around the provision of government support, that puts a lot more focus on where the loss-absorbing capacity story has got to.

A second key theme is the continuing development around senior or quasi-senior instruments, which I think are quite interesting to see just where that goes. We will be tracking that and what it means, particularly for the clarity around default risk on certain types of liabilities; that’s something we continue to monitor very closely.

Sandeep Agarwal, Credit Suisse: This debate is fascinating, because it’s not over yet and I think there are a lot of factors that are going to continue to change, not least the rating agency moves that are important. I think the November FSB meeting will clarify the TLAC rules. We are also waiting for clarification around the debt versus equity accounting of AT1, which I think is happening already, so that will change the mix people will want to issue.

Those are two deltas in my mind about Tier 1 and Tier 2. Then the quantum of capital issue rests on how the RWA rules move, whether it’s the FRTB, whether it is the capital floors or the risk weighting on credit risks; all those elements are big deltas. There’s a lot of work to be done.

Then finally, of course, there is leverage – understanding where the leverage numbers will finally sit in the minds of the regulators. Only some jurisdictions that have clarified that and not all have taken a stance.

Khalid Krim, Morgan Stanley: If I look back at last November, at last year’s IFR Bank Capital Conference, we were saying on the topic of TLAC or MREL that for banks – European banks in particular – that it was urgent to wait and get clarity from regulators, ascertain the direction of travel, and get certainty about what are the regulations telling us.

At the forthcoming IFR conference in November, I’ll be of the view that it will be urgent to act in terms of implementing a strategy, and having it in place with the regulator and then using 2016, 2017 and 2018 to implement that strategy. That’s the way I would look at the next six months.

The macro environment will always be what it is. People will need to think about acting and implementing the capital plan and their TLAC and MREL strategies.

Steven Penketh, Barclays: It’s just managing business-as-usual on a capital and funding basis through a period of continued ambiguity. That means that from an issuer’s perspective you just have to maintain an indefatigable zest for communicating with investors and just making sure that they’re aware of all the different nuances that come around.

It is well understood that bank intermediation is about taking deposits and making loans, but there’s actually another lens now: the communication of regulatory policy to the Street; because we are the people right in the middle of it.

Daniel Shore, HSBC: I agree with Sandeep and there are probably even more considerations. Hopefully we’ll get more clarity coming through around internal TLAC for some of the global institutions. The key thing for me is there are lots of different things to think about, but the harmonisation and the level playing field are the two elephants in the room that if they don’t continue to move forward, everything else will just potentially disintegrate.

And as I touched on earlier, a key issue if how you value credit. How, as an issuer, do you sell your credit? Steven talked about transparency etc but there are things that are going to affect that dramatically. We said we were positive about harmonisation, about equality across Europe, Asia, and the US.

Paul Oates, UBS: For Moody’s and Fitch we already have a fair view of what’s going to be happening. S&P has given most banks in Europe outside of the UK, Germany, and Austria a number of actions if you start to think about support reviews, so I think it’s ideal in as much as there’s so much uncertainty at the moment about what needs to be in place for MREL and TLAC that they can have those longer conversations.

We may see some issuance, where we see some banks probably having to issue quite large amounts of Tier 2 in particular, and you may see some benchmark issuance just to show that there is market capacity to absorb volumes of Tier 2 or new instruments from these banks. I also think, there’ll be more on where capital sits within banks. For certain banks the structures are starting to change now, and we will have to see some internal allocation of bail-in capital rather than just what the whole group has as a whole.

Gerald Podobnik, Deutsche Bank: Most has been said already, like progress of Basel IV, finalisation of the leverage ratio in Basel, resolution clarity. The only issue that I would add is I’d be interested to see where we go over the course of the next couple of months on Liikanen, whether where there is any material progress on it, so I would be interested to see where this develops and if there are any implications on group capital management.

Laurent Frings, Aberdeen Asset Management: For me a big issue is how the markets take to the changes in the rating agencies in terms of how they think about the loss severity per instrument, and how that translates into ratings and how investors take it on board and change the way they think about the pricing of those different instruments, but that may take much longer than six months.

The other one is what’s happening in Germany and to what extent other countries follow that route – and again whether we go country by country, whether we go to BRRD2, whatever the route is to make the resolution regime easier to put in place.

Ultimately as an investor that changes potentially dramatically the loss severity for different instruments and how you price them. That and supply-and-demand dynamics have this massive interplay, so for me those are the two big themes over the next six months.

IFR: Ladies and Gentlemen: thank you so much for a spirited conversation.