I SPENT A couple of days in Frankfurt this past week, where among other things I chaired a fascinating roundtable on the corporate funding landscape against the backdrop of structural shifts in banking and financial markets and ahead of potentially challenging times in 2016. It was pretty absorbing stuff.
Our panellists hailed from DCM and syndicated loans on the sell side, a representative from a major buy-side shop as well as financing and treasury officials from three multinational corporations based in Germany. In a wide-ranging discussion, we inevitably got on to the perennial topic of the impact of bank regulation. I was particularly eager to hear what the issuers present – Bayer, Daimler and SAP – thought of the barrage of regulation facing the banks.
I confess to being a little surprised, to be honest, that clients showed certain sympathies with the predicament their banking providers find themselves in. In retrospect, I’m not entirely sure why I was surprised. After all, major corporates are big users of capital markets and of investment banking services in general so the changes being wrought on the status quo have an immediate impact on them.
There was broad agreement from the client side at our discussion that there was far too much banking regulation on the docket and that the continuing waves of updates, additional themes, tweaks and consultations were starting to be truly fatiguing and counter-productive.
The phasing will be a boon for European banks, which are further back in their rehab than their US counterparts
OF COURSE, FORCING banks to rethink and rework their strategies, optimise their service provision and review/downsize/optimise/exit certain products or geographical segments is all well and good. But by the same token it’s playing havoc with how clients manage their banking relationships. It’s not just the sheer amount of in-process regulation out there; it’s the multiple agency initiatives and the lack of certainty that it’s all going to fit together seamlessly on a global scale (it won’t). This matters to multinationals.
I’m not sure we’ll ever get the regulatory moratorium that was put on the table in Frankfurt; there’s simply too much unfinished business out there. But what about the issue of regulatory roll-back or relaxation? While we were having the discussion, I was reminded of a piece I wrote back in June on a potential loosening or dilution of the most stringent interpretations of regulatory drafting in areas of unfinished business. I wondered if that might be an emollient to the issues of concern to our speakers.
I’d written in that piece about my incipient and subtle perception that regulatory zeal might be waning and that we might be hitting regulatory exhaustion – from all sides. On my mind then were the review of bond market liquidity and the more nuanced outcome in the UK around proprietary trading (ie, less than an outright ban); both of which I took to be potential soft policy retracements.
MORE RECENTLY, OF course, it emerged that the recommendation to the G20 for the TLAC calibration for G-SIBs would see the initial requirement set at 16% of risk-weighted assets from 2019 – lower than the 20% on the table – with the higher hurdle phased in from 2022. The Americans had wanted 20% from the get-go. If accepted, the phasing will be a boon for European banks, which are further back in their rehab than their US counterparts.
And then on October 15, within that barrage of documentation in and around the two new consultations unleashed by the Bank of England and Prudential Regulation Authority on ring-fencing, plus the statement from the UK Treasury about the Senior Managers and Certification Regime lay some concessions to the banks.
The Treasury updated the rules around the vindictive and wholly unfair SM&CR, eliminating the dreadful “reverse burden of proof” where senior managers were assumed guilty unless they could prove innocence to a much more equitable situation where the burden of proving misconduct or negligence under the regime will now rightly and properly shift to the regulator when it kicks in in March 2016. A nuance maybe, but an important one.
The businesses of ring-fenced bodies will continue to be restricted in order to protect them from shocks elsewhere in the group or in the system in general; to promote orderly outcomes in the event of failures; and to protect continuity of operations.
But we did get a little more clarity vis-à-vis prudential requirements for sub-consolidated entities, which will sit alongside individual entity and fully consolidated group requirements. We also learned some more around intra-group exposures, transfer arrangements and dividend and other distributions. (We didn’t get any further guidance on the leverage ratio or net stable funding ratio for RFBs; that’ll have to wait for the Financial Policy Committee to act on the outcome of international deliberations.)
RFBs will be able to make distributions to group entities if certain conditions are met: including giving reasonable notice to the PRA and supplying key data: date and amount of intended distribution; CET1, Tier 1 and total capital ratios of each group RFB; and an assessment of the impact of the distribution on the current and forecast capital position of each group RFB.
Wholesale dividend transfers willy-nilly up, down and through consolidated groups won’t be permitted. In my commentary on Jes Staley’s ascension to the corner office at Barclays a few days ago, I’d naysaid any notion that he’d be able to build out the investment bank with cheaper capital from the retail business – even if that were strategically ordained – because of ring-fencing. I don’t think I saw anything in the latest pronouncements that contradicts that. Yet.
Sorry Jes…
