IS THE EUROPEAN regulatory landscape evolving at cross purposes to the recent direction of travel around bank strategy and investor behaviour? In light of pronouncements from Barclays and Deutsche Bank CEOs Jes Staley and John Cryan, I’m starting to wonder.
Staley’s comments when the group’s results were unveiled on March 1 about creating an integrated consumer, corporate and investment bank anchored around its two core markets in a transatlantic corridor strategy were broadly consistent with what Cryan is after. He wants Deutsche Bank to be a leading universal banking provider offering international corporate and capital markets solutions – but with strong roots in Germany, with a bias towards serving German clients. A “putting-the-Deutsche-back-into-Deutsche-Bank” strategy.
Both seem eminently reasonable, allowing them to create more focus around a core set of clients into which they can embed themselves up and down the product spectrum. To do that successfully in DB’s and Barclays’ home markets requires a truly international approach given the number and nature of the large and mid-sized clients in their home markets and their need for global cover to fulfil business needs.
But at the same time, it’s obviously more of a stay-at-home approach than the previously globalised corporate and investment banking model, which dictated that to be a successful player you had to be agnostic as to location, currency, product and client. That has clearly been discounted in light of post-crisis regulatory moves and banks’ own reappraisals of what they need to do and how to generate returns comfortably and sustainably above their cost of equity. It may not be parochialism, to discount that slightly pejorative term, but it is by definition more parochial.
SO WHAT DOES that have to do with the progress being made by the slow-moving but steady regulatory juggernaut in Europe? It may be a bit of a stretch but I wonder if the two streams are starting to move in different directions. Are policymakers seeking solutions to the wrong problems? Or are they proceeding on the basis of skewed responses to events?
Moves towards a transparent, harmonised regulatory and supervisory approach, pushing for standardised templates, modes and methodologies, and creating new sets of cross-border euro financial instruments (as separate from their domestic versions) have been front and centre of the debate across the range of markets captured by Capital Markets Union. It includes DCM, private placements, securitisation and covered bonds.
But reaction from market participants to it all has tended to be negative. They say there’s no need for the cookie-cutter approach to capital markets that the European Commission seems hell bent on creating, in order to promote ease of comparability by the buy-side as well as by corporates. Market participants – sell-side, buy-side and clients – not only want to maintain the differences and nuances; they firmly believe difference offers myriad opportunities to maximise return/minimise cost, and that diversity and diversification are forces for good.
Part of the reason for policymakers’ drive towards pan-European solutions lies in the investor behaviour they witnessed during the eurozone crisis and which seemed unduly to alarm them. I’m referring to the sharp reduction in cross-border activity amid the volatility at the time and a return to familiar domestic markets and a lack of preparedness to lend cross-border as risk appetite evaporated.
What policymakers took from that was less a sense that market actors tend to exhibit innate conservatism during times of stress; more that it was the result of an unlevel regulatory playing field and a lack of harmonisation. Their response was that promoting regional standardisation would create sustainable cross-border flows. I’m not sure one follows from the other. It’s a view not shared, either, by most market participants who naysay the notion that removing business and product arbitrage – and ignoring product cultures – necessarily leads to better outcomes.
SO IF BANKS are retreating to more localised business models and investors stick close to home especially during difficult times, where does that leave the direction of travel in the trenches of financial product design? Slightly askew if you ask me.
Has the emergence of standardised Euro-PP revolutionised the world of private placements, for example, to the benefit of issuers or investors? Hardly. Will the creation of eurocovered bonds, as postulated by the European Commission as distinct to Pfandbriefe, Obligations Foncieres, Cedulas Hipotecarias etc suddenly lead to better outcomes for all?
There’s no evidence to suggest that’s the case. In fact, there are some who believe that creating Frankenstein markets will be accompanied by perverse policy-driven incentives to use them to the detriment of existing markets that, certainly in the case of covered bonds, functioned pretty well during the crisis. And even when markets didn’t function well, such as securitisation, ABS professionals similarly believe that rather than boosting the market the EC’s STS proposals could actually kill the asset-class in Europe stone dead.
There’s nothing wrong at all with promoting best-practice or instilling high-level directives for individual jurisdictions to implement as they see fit. But the European Union’s technocratic drive to create artificial products and legislate for artificial markets when the effort should be on local players to improve local solutions – especially when financial intermediaries re-align along more localised lines – seems an odd and potentially dangerous way to proceed. A bit like seeking an antidote for a disease that hasn’t made anyone sick.