As mentioned, I attended two great sessions, so here’s the next one: can transaction banking survive in this world of regulation?
A good theme and one that I was really keen to hear about, particularly as David Wright was part of the panel. David was instrumental in the European theatre during the development of MiFID and is now Secretary General of IOSCO, the International Organization of Securities Commissions.
Joining David on stage were:
- Jaspal Singh Bindra, Group Executive Director & Chief Executive Officer, Asia, Standard Chartered
- Barbara Ridpath, CEO, International Centre for Financial Regulation
- Francesco Vanni d'Archirafi, CEO Transaction Services, Citi
No-one wants to hear about how many countries, clients or currencies you deal with as a bank Francesco, so don’t do it.
The only direct quote I will attribute to him is “we should have the clients serving our needs better”. He meant we should serve our clients’ needs better, but he probably got the statement right in the first place according to the other banking guys sitting near me.
Anyways, here are my highlights of this session (impressions not quotes):
David Wright:
Most of the banking people I meet, when it comes to regulation, ask: is there light at end of tunnel or are we still in the middle of a storm?
The regulatory bodies, the G20, the Basel Committee, IAIS, IOSCO and more, are making a massive effort to make the system safer, sustainable, productive and socially acceptable. There is a massive political effort under way.
The job is now at an interesting point of time, for a number of reasons.
There is a lot of conceptual agreement on the key regulatory issues, and I would list them as:
- the resolution framework for failing financial institutions;
- the level of bank capital, which is going up;
- the whole OTC derivatives package, which is due to be finished by the end of this year; and
- a nexus of issues around securitisation, repos, money markets and shadow banking; and finally
- improving corporate governance in financial institutions, and having concomitant deterrent sanctions.
The big question is: will all these principles be implemented in a consistent way and, if they’re not, we face much higher costs and friction.
Right now, there are two big challenges, one on the OTC derivatives package with the restrictions in the USA and overlapping rules. The second issue is an important one on the increasing divergence of accounting rules.
Beneath this there are other big issues. The toolbox for getting to convergent regulation is weak. There are no enforceable sanction powers and so we can only use peer reviews, transparency, political pressure, monitoring and the press, as there are no institutional binding mechanism as there is with the world trade council, for example.
As we see capital being raised around the world, there will be new capital markets and then we get into new markets that are a matrix of 3x3 or even 10x10 as these markets evolve and develop. This was reflected in the remarks of Simon Tay yesterday (see blog).
Here we are, in year six of this crisis, and we are still struggling to understand all the aspects of shadow banking, which covers 100% of the GDP of the world.
What are the effects on liquidity and capital; have we got the balance right; what are the impacts on credit supply; and so on. We need much more co-operation amongst these bodies to make these things work.
Barbara Ridpath (who was moderating):
Jaspal, do you concur with David’s comments?
Jaspal Singh Bindra:
We welcome regulation and change, but it is getting too complex. We have no difficulty with compliance but, with each of the regulators in our local markets having divergence and differences, it makes it a challenge.
Regulators must be conscious that there has to be a balance, as if the banks fail to support the real economy due to these changes, then that will be a disaster.
Importantly, there are very definitely some unintended but real consequences.
Finally, the emerging market voice is not being heard or having the voice it deserves, as these regulatory systems are being developed.
Barbara Ridpath:
And Francesco, what are your regulatory challenges?
Francesco Vanni d'Archirafi:
Every weekend we update 6,000 lines of code in our transaction systems across 96 countries of our operations to be consistent with regulatory needs and compliance. That is every weekend.
And unintended consequences of regulations also worry us a lot, not just from a liquidity point of view. We are pushing liquidity outside of the banking system, and the more we create these complex matrices, the more we will see people using shadow banking to work around these challenges.
Barbara Ridpath:
If regulators could create regulations consistently and in a co-ordinated fashion, we would not have to update systems so frequently. We have seen several instances where every regulator was asking for different data on different dates in different formats, and when we said we couldn’t deliver, we were accused of obfuscating. The regulators need more co-ordination, as this inconsistency of demand, approach and timing causes global operators a massive headache.
Francesco Vanni d'Archirafi:
Exactly. For example, our submission on the Basel III regulatory changes ended up being 2,300 pages, excluding the appendices. To operate, you need to comply with the rules to keep your licence in every country, region and globally, and we can provide the information but there are not enough roundtables with all the relevant stakeholders to deal with this complexity in our environment.
Barbara Ridpath:
You said in your opening Jaspal that the Asian voice is not being heard enough. What did you mean?
Jaspal Singh Bindra:
Too big to fail and deleveraging the excesses of the past is a Western issue. If you look at the banking sector in the emerging markets and Asia, the challenge is very different for banks. It’s more about how to support growth in the real economy, create jobs and ensure financial inclusion to lift Asia out its low levels of growth in the past. That in itself means that anything entirely based around the needs of the developed world cannot support the needs of the entire world.
The regulations being introduced as the medicine for the Western crisis are all having an impact on our operations, in terms of higher costs of capital, efficiency and portability of liquidity, headcount and operations.
In particular, trade finance will suffer, there will be a higher cost of finance, and that will be passed on to the customers where possible and, if not possible, then bank businesses will close down. There is also a bigger impact on long-term finance and that will upset the emerging markets again, where there is a major requirement for infrastructure investments.
This is why there should be preferential treatment for trade finance.
Barbara Ridpath:
The deleveraging of the European banks back to domestic markets has an impact. Is that being filled by American and Asian banks?
Jaspal Singh Bindra:
Some of the loss of capital and finance from Europe has been picked up by Asian and American banks, but we’re talking about a humongous vacant space. It’s not that the hole has been filled, it’s that the demand, the hole itself, is growing fast and it’s getting bigger by the day.
Francesco Vanni d'Archirafi:
The trade finance needs of Africa, Latin America and Asia are great, and there is a challenge particularly when looking at the supply chain needs of small to medium sized companies. We are not happy on the trade side as it is obvious that not all the businesses on the trade side have structural liquidity. That means an imbalance in counterparty trade, and it is important that as banks deleverage due to regulatory needs, we continue to finance the commercial flows of our clients.
Barbara Ridpath:
The Basel committee’s greatest own goal has been the impact on trade finance. They recognise it, but it’s after the horse has bolted. How can regulators avoid scoring these own goals?
David Wright:
To avoid this, you consult widely to look at the economic impacts, to ensure such problems don’t exist. Everyone makes mistakes, and I’m not saying whether the BIS did or not, but it’s a choice. You can have local, national and regional rules, and there will be a lot of arbitrage across markets and the banks will call that unfair competition. Or we can work as constructively as possible to create global frameworks at the global level, but with allowance for freedom to interpret at the local level. It’s like the difference in Europe between a Directive and a Regulation, and this creates some flexibility.
One point about the East-West issues, my colleagues in Asia were saying crisis, what crisis, you created it, you sort it out, and I think we should look at the countries that have not been caught in this maelstrom and ask why they were not impacted. Was it due to regulation, governance, markets or more and it’s a debate about complexity versus simplicity.
So some flexibility yes, but you cannot have a free for all.
Francesco Vanni d'Archirafi:
AML and KYC is a key area and we need to work out how to do more intelligently, as fragmentation can be a killer, especially as we move our world to digital mobile operations.
David Wright:
From a regulatory perspective, everything starts from a need for financial stability. The issue now is that the damage is so bad. There’s been a fifteen percent loss of global GDP, a forty percent increase in the Western world’s public sector debt, and more. These are the things you simply cannot ignore as a regulator.
We need the banking industry working for the economy and not the economy working for the banking industry. The financial industry needs to work for the real economy, and it’s getting this balance right. During a crisis, the concern is that the pendulum can swing too far the other way.
Then we have things like LIBOR, and what does this do to the mindset of the regulator and, more importantly, the mindset of the public?
We just want a financial system that is stable. We remember 2008 too much when we all thought the lights were going out, and that’s what this is all about .
The problem we have is that we are all looking at the Basel framework, and when you find a region or major country completely ignoring this framework, hyo uahve to ask will that region or country be compliant: yes or no. and then we have cpaitla markets growing in these regions ansd we wonder what that will mean.
Barbara Ridpath:
If you read that you have to have regulators who cantrust their counterparties, not just banks who trust theirs.
David Wright:
That’s an issue. A big, big issue.
It starts with a convergent framework of law in all the regions. If the laws are different, you cannot increase cooperation. We need a quantum leap in cooperation and, more importantly, trust. You cannot resolve a failing institution that has a global structure if there is a region or major country in the system that does not cooperate or have trust. At the end of the day, under the current framework, there will not be the legal instruments or incentives to make this work.
The more co-operation and the more convergence, the safer the financial system will be and that’s why we need a quantum leap.
Jaspal Singh Bindra:
There’s context here that needs to be understood. Look at the Asia regulators. They took a great deal of medicine from the regulators of the west when we had a crisis in the 1990s. You have the same issues ten years later, and you should take that same bitter pill that we took.
Hmmm … I think the Asian tiger wants to bite back … more on this later, I’m sure. Anyways, off to the innotribe again …
Great post, best I have seen from #sibos. Thanks
Posted by: Bernardlunn | October 31, 2012 at 01:24 PM