April 1, 2012 5:57 pm
Global finance: Conflicting signals
.
.
Post-crisis pledges by world leaders to work towards harmony in regulating banks and markets are in danger of coming to naught
.
.
When financial regulators from 27 countries gathered in the Swiss city of Basel in September 2010 and agreed to force the world’s banks to hold more and better quality capital, bankers and politicians hailed the agreement as a watershed. The deal, known as Basel III, was expected to be the first of many steps toward a safer, fairer and better policed global financial system and a bulwark against a repetition of the 2007-08 crisis.
Fast forward 18 months and progress is not so clear. While everyone agrees markets should be easier to monitor and no bank can be “too big to fail”, many countries are putting forward contradictory and competing proposals on both. Even on bank capital, the one big success story, unity is breaking down as European Union, UK and US authorities accuse one another of watering down or delaying the tougher standards.
“Global unity is now noticeable by its complete absence,” says Simon Gleeson, a UK-based regulatory partner at Clifford Chance, the law firm. “What it demonstrates is that we need a greater degree of international co-ordination than we actually have.”
The disharmony is confusing and expensive for banks, which are spending billions of dollars to prepare for and comply with the various rules and fear they will be unable to compete with more lightly regulated peers in other countries. “It’s a bloody nightmare. The regulators have no respect for one another at all. Each country is looking after itself,” says a senior executive in charge of regulation at one of the world’s biggest banks, echoing a sentiment voiced by peers at five other global institutions.
.
Greater still than the complications for the sector itself are the potential costs to the world at large. The global regulatory rethink was supposed to prevent a repeat of a financial crisis that dealt such a large blow to economic growth that many countries are still struggling to recover. But with the supposedly co-ordinated process showing signs of descending into box-ticking, protectionism and cross-border legal battles, patchwork rules would make it harder to reach around the world to match buyers with sellers and borrowers with savers. That in turn could curb competition and drive up the cost of everything from home mortgages to the complex derivative contracts that governments and businesses use to protect themselves from price rises.
Already, officials in Tokyo, London and Ottawa are warning that their sovereign bond markets are under threat from a US rule aimed at making banks less risky, and UK insurers are warning that a new EU regulation could make them up sticks for Asia.
.
Worse, the ultimate goal of improving financial stability may also move out of reach. Co-operation is crucial to taming the problems caused by the operations of big multinational banks and by regulatory arbitrage, whereby risks simply move across national borders and into less regulated parts of the financial system.
.
Right before the financial crisis, the hedge funds, money market funds and special purpose vehicles collectively known as “shadow banking” reached $50tn in assets, one-quarter of the entire financial sector, and troubles in parts of the shadow sector helped drag down traditional banks. Recent research suggests the shadow sector has returned to its pre-crisis levels.
Some regulators and politicians say the focus on disharmony misses the larger picture. Since 2009, leaders of the Group of 20 industrialised and developing nations have met annually and reaffirmed their commitment to a series of financial reforms. Most members have put forward proposals to tie banker pay to risk and to force private derivatives – bets between two sides on movements in interest and exchange rates or the price of commodities and securities – into “clearing houses” where risks can be balanced and more easily monitored.
The Financial Stability Board, a global regulatory body charged with carrying out the G20 reform agenda, has also hit 29 “global systemically important financial institutions” – known to the geeks as GSifis – with extra capital charges and required them to write “living wills” that detail what could be done to stabilise or shut them down in a crisis. The Basel committee, which works closely with the FSB, has also been vocal about plans to hold members to their promises on bank capital and liquidity by shaming those that fall short. Even now, it is working on reports on how the rules are being applied in the US, the EU and Japan. “The corrosive forces of short memories and supervisory complacency . . . must be avoided,” Stefan Ingves, its chairman, has said.
.
But the industry counters that the broad agreement on principles and the need to enforce them is being undermined by the laws and regulations being proposed by G20 nations.
Take central clearing of derivatives, a process of sending such contracts through an institution that balances them off each other and forces each party to post collateral in order to cover potential losses. Singapore and Hong Kong have each said they want mandatory clearing of derivatives involving a party based in their jurisdiction by the end of the year. That sets up a conflict with similar measures in train in the US and EU.
.
Unless the localities work out a way to recognise each others’ clearing houses, two centres could lay claim to the same derivative even though it can be cleared only once. “The trend is for countries or the EU to put in place legislation that on the face of it implements G20 commitments but in practice is uncoordinated with other countries,” says Michael McKee, a lawyer at DLA Piper. “So the outcome is not so much conflicting objectives as conflicting solutions.”
On living wills, or “recovery and resolution plans”, a recent Ernst & Young survey found big Japanese banks had barely started their planning. The EU this month admitted that proposals on “crisis management and bank resolution” – promised since last summer – needed more work.
Banks in the US and UK are farther along but their experiences are not reassuring. One top executive says his global institution was warned last summer by US regulators not to share its draft plan with the UK, suggesting a lack of respect and trust. Others say they have faced conflicting instructions from the various countries where they have large presences. “There is a mismatch between the brave G20 announcements of global solutions and the messy practicalities of national authorities, scrambling to protect their own national interests,” says Jon Pain, a former UK regulator now at KPMG, the accountancy firm.
.
Even basic reporting requirements have become a problem as regulators around the world ask for more data to help them spot and understand looming threats to financial stability. A fund manager in Asia who has clients in both US and the EU may have to report the same data sliced and diced in different ways to at least three regulators. “For us, the fragmentation is a disaster,” says a bank executive in charge of lobbying. “The G20 agreement is a brilliant idea but it doesn’t have enough teeth.”
The problem goes beyond different interpretations of that pact. Reformers in the US, EU and UK are pushing ahead with individual reforms that will affect groups based elsewhere, raising hackles in nations that opted not to make similar changes.
The US is seen as a chief offender because its 2,000-page plus Dodd-Frank reform act includes a slew of rules that affect not only American banks in the US but the overseas arms of US banks and the US arms of overseas banks. Japan, Canada and the UK are particularly angry about the “Volcker rule” preventing banks from betting with their own money, because they fear it could sap liquidity in non-US government bond markets. The EU has also stepped up criticism. “It is not acceptable that American rules have such a great effect on other nations and foreign capital markets without any international co-ordination,” Michel Barnier, services commissioner, said on Friday.
On the other side of the Atlantic, many fear the EU’s new rules for hedge fund managers will in effect exclude groups from outside the bloc. EU insurance regulators are meanwhile insisting that their new tougher capital and risk management requirements, known as Solvency II, must be applied to US divisions of EU insurers, a step the industry insists will make them uncompetitive. At least one UK group, Prudential, is weighing whether to move its headquarters to escape the worldwide requirements.
Asian regulators are for their part waking up to the potential impact of both the US and EU rules on their markets and are not particularly pleased, lawyers and bankers say. That region’s banks largely avoided the worst problems of the 2008 crisis and “it’s coming as a big surprise how extraterritorial these regulations are”, says Mark Shipman, a Hong Kong-based partner at Clifford Chance.
Global efforts to strengthen regulation are also fracturing relationships within the EU. The UK and Sweden are rallying other countries against the Commission’s plan to prevent individual member states from enacting tougher rules than the EU-wide standard. In addition, the European Banking Authority, a new pan-EU regulator, had its plan to rebuild confidence in eurozone banks through tough new capital requirements undercut by efforts in France, Germany and Spain to secure changes that made it easier for their banks to meet the standards.
Even when countries do manage to work together, the process is often more tortured than it should be, the industry says. This month the European Securities and Markets Authority, the new pan-EU regulator, headed off a potential freeze in credit markets by ruling that banks could use ratings issued by agencies based in the US, Hong Kong and Singapore for regulatory purposes. Esma found oversight of the raters in those countries was “as stringent” as the EU process.
But bankers say this agreement, coming less than two months before a deadline that would have banned the use of other ratings, is all too typical of harmonisation efforts. “Often at the 11th hour, the regulators come up with a compromise that is workable . . . but you as a firm have to spend a lot of time, effort and money preparing for the possibility that the eventual outcome isn’t sensible,” says a regulatory official at one global bank.
Some wonder whether uniform global regulation is simply a pipe dream. “Being overambitious will lead to fragmentation and protectionism,” says Jacqui Hatfield, law partner at the Pittsburgh-based Reed Smith. “It would be better to aim for a commitment to uniform high-level global principles than a set of global harmonised rules which are almost impossible to implement.”
..
Main refroms: Amid the acronyms, a thicket of new thinking
.
Banks, brokers and insurers feel buried in new proposals. No wonder: last year brought 14,215 regulatory announcements worldwide – an average of 60 a working day, according to Thomson Reuters. The most notable reforms are:
Dodd-Frank Named for its sponsors, the 2010 US financial reform law is more than 2,000 pages long. Notable changes include a national consumer protection bureau, tougher capital standards for banks and new oversight for over-the-counter derivatives, credit rating agencies and large non-banks that provide financial services. Wall Street has been lobbying hard for revisions or reversals.
Volcker rule One of the most controversial parts of Dodd-Frank, it prevents banks from placing trading bets with their own money and limits their investment in private equity and hedge funds. The industry and foreign governments are lobbying hard to water down the implementing rules, saying they will dry up liquidity in key markets such as government bonds.
Emir This draft European Union directive seeks to reduce the risks from OTC derivatives – essentially bets on anything from interest rate movements to commodity prices. The law, which is nearing final adoption, will force most of these contracts to be settled in clearing houses, which hold collateral against the failure of either side and make it easier for regulators to see what is going on.
AIFMD Passed in 2010, this EU law sets pay, capital and other requirements for hedge funds, private equity and other alternative investment managers. It has been the subject of prolonged wrangling because of its strict liability provisions for investment losses and complex rules for fund managers based outside the 27-nation bloc.
.
Basel III Tougher bank capital and liquidity rules enacted by a global group of regulators based in Switzerland will be phased in between now and 2019. The industry says they will harm growth and is lobbying national regulators to water down or delay their implementation.
Solvency II These EU insurance rules are supposed to go into effect in 2014, but the industry argues that the standards, which set tougher risk management requirements and higher capital requirements, threaten to increase costs and make Europe’s insurers uncompetitive elsewhere.
Extraterritoriality This tongue-twister is a quick way to describe the unpleasant – to the rest of the world – habit the US and the EU have of applying their laws globally to any group that does business on their turf. So US subsidiaries of EU insurers still have to abide by Solvency II and the Asian arms of US banks must respect the Volcker rule even though the local regulator does not require them to.
.
Additional reporting by Alex Barker
.
Copyright The Financial Times Limited 2012
0 comments:
Publicar un comentario