ALMOST a year ago to the day, the chancellor predicted 2013 would be the year banking was reset. Entering 2014, it is worth remembering that pressing the reset button is only the start. In a hectic few days before Christmas, politicians in Washington passed the Volcker Rule, the UK’s Banking Reform Bill received Royal Assent, and finance ministers in Europe reached political agreement on banking union. A week is a long time in politics, but few expected the same to be said of structural banking reform.
Britain’s banks are now adjusting to a more robust supervisory regime and preparing to ring-fence retail and investment operations. Regulators now have a competition mandate, aided by a new payments systems regulator and seven-day current account switching.
Banking union in Europe is advancing at a similar speed. The Bank Recovery Resolution Directive (BRRD) provides a toolkit for the orderly resolution of banks. The European Central Bank’s asset quality review and European Banking Authority’s subsequent stress tests will ensure the system has sound foundations.
The latest developments in Brussels suggest that the EU is following the US’s lead on proprietary trading. The “Barnier” Rule and the Volcker Rule both limit the ability of retail deposit-taking banks with investment arms to trade for their own benefit. While the nature of Britain’s reforms differ from those in Europe, the European Commission’s response to the Liikanen report recognised our approach as being equivalent in nature.
The end in mind stems from 2008, when banks took excessive risk and taxpayers footed the bill. This resulted in a consensus to fix “too big to fail”. Top of the list for 2013 was ridding the sector of moral hazard, and regulators reached general agreement on the requisite medicine – bail-in powers and the restriction of certain activities. December’s reforms mean that, in 2014, it will be creditors – not taxpayers – who are liable to take any hit.
But responses reflected political realities and countries chose different treatments. Each course of medicine, therefore, is set to have different side-effects. What started as simple ideas – restricting proprietary trading and ring-fencing banks – have hundreds of pages of accompanying text. Confusion over implementation could lead to restricted service offerings, reduced product choice and higher costs.
In the UK, the secondary legislation accompanying the Banking Reform Bill currently restricts the range of services offered to small businesses from ring-fenced banks. Additional bureaucracy around planned certification could lead to high net-worth individuals incurring higher costs for using non ring-fenced banks. Smaller banks may not be able to obtain funding from ring-fenced banks that hold their deposits. There are similar concerns over the Volcker Rule’s impact on community banks and those with substantial holdings of trust preferred securities. The challenge is greatest in Europe, where political institutions will break for elections.
Differing responses carry the risk of greater regulatory divergence. This can lead to higher compliance costs, reduced competition and barriers to entry. But there is nothing inevitable about these effects. Promoting global regulatory convergence, cultural change and greater transparency are the real challenges for 2014.
A lot can happen in a week, but sustainable reforms take time.
Anthony Browne is chief executive of the British Bankers’ Association.