As European countries prepare to introduce Basel III, concerns are mounting that its implementation will highlight a chasm between different countries in terms of bank capital levels. Is the banking sector about to see a new era of regulatory arbitrage?
“This is not an issue anywhere else in the world; other countries have moved on,” says Simon Hills, executive director at the British Bankers’ Association. “Universal full service banks provide small and medium-sized entities and other exporters with the full range of financial services to meet their needs. As a trading nation, seeking to re-emphasise the value of manufacturing exports, they are crucial to the success of the British economy.”
While the banking industry is resolutely against any plan to split retail operations from the businesses famously described by UK business secretary Vince Cable as “casino banking”, others see the move as a more subtle play on the trade-off between capital requirements and financial stability.
“What the ICB seems to be trying to do is to strike a balance between ring-fencing and capital requirements,” says Alistair Milne, reader in banking and finance at the Cass Business School. “Either you have ring-fenced banks that are quite restricted in what they do, or you give them more freedom and you put in a lot more capital. This is exactly the type of balance that could be struck variably in different European countries.”
A related area of concern to UK regulators surrounds so-called branching powers. Under European bank “passports”, firms such as Deutsche Bank can set up “branches” in the UK rather than legal subsidiaries. Whereas branches are regulated by home authorities, subsidiaries come under UK authority, and would be subject, for example, to local deposit insurance schemes and bankruptcy law.
The regulator’s stance on branching came after the UK Treasury was forced to pay out £7.5 billion in loans and compensation for savers after the Icelandic banking crisis.
Linked to the worry over branching and the ICB’s proposals for ring-fencing is the wider debate in Europe over resolution plans. From the ICB’s perspective, ring-fencing would be a big step in the direction of making resolution simpler, with the separation of retail banking likely to ease the management of any of the riskier banking activities in any crisis.
However, resolution is one area in which the international community is unlikely to push for the same uniformity of rules under Basel III that was required under Basel II, believes Milne.
“An example may be France, where there is strong support for the universal banking model. In that scenario the European Banking Authority might then say, ‘Well, that is fine – keep universal banking but in exchange we need to see much stronger resolution plans or higher levels of capital.’ It’s all to play for but there will be a fair amount of politics in this.”
Switzerland is already playing off capital against resolution, with the country’s largest banks expected to be given a discount on capital if they put an efficient resolution plan in place.
The Basel-based Financial Stability Board has ordained that all member countries must run a pilot on living wills. This must comprise a rescue plan, designed to improve a bank’s capital and liquidity by raising capital or selling assets, and a resolution plan, defined as managing the demise of a firm in a way that minimises systemic disruption and costs to creditors and taxpayers.