At the Institute of International Finance, Axel A. Weber (Chairman of
UBS), James C. Cowles (Chief Executive Officer, Europe, Middle East
and Africa (EMEA), Citi), Dr. Thomas F. Huertas (Partner, Ernst &
Young), Dr. Yves Mersch (Member of the Executive Board, European
Central Bank), and Frédéric Oudéa (Chairman and Chief Executive
Officer, Société Générale) discussed, on June 26, 2013, the
resilience of banks.
The discussion was lead by Axel A. Weber who describes safety,
stability, and protection of the overall economy from systemic risks
as major objectives of today’s reforms in the financial sector.
Obviously, nobody criticizes these objectives. What is blamed,
however, are implementation and possible absence of a level playing
field for banks.
Basel III
Compliance with Basel III is not only a regulatory, but also a
competitive issue for banks. According to James C. Cowles, clients
and other stakeholders expect banks to comply. He says: “Our
clients want to do business with banks that are safe and sound.”
Another competitive aspect is that Basel III compliant banks will
face a lower cost of capital.
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James C. Cowles |
European banking union
The speakers applaud the European banking union as it triggers a
higher discipline of banks and their creditors and brings a bank’s
cost of capital in line with its risk profile. Another positive
aspect of the new regulation is that supervision will become much
stricter and proactive.
Agreeably, EU-wide recovery and resolution plans are key to ensure
that the financial system remains stable even if a large institution
fails. What’s more, they welcome the idea to place the cost of
resolution upon investors instead of taxpayers. However, as Dr.
Thomas F. Huertas emphasizes, the European recovery and resolution
directive is not the whole answer to the question of how to ensure a
sustainable financial system. As a matter of fact, banks should use a
recovery process to improve their business in the future as opposed
to simply returning to the status quo.
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Dr. Thomas F. Huertas |
On the downside, people are mostly concerned about inconsistent
implementation across Europe and the implementation cost this will
trigger for banks. As Dr. Yves Mersch points out, exemptions,
waivers, derogations, and grandfathering should remain exceptional;
no member state should be allowed to opt out from the European
banking union.
Role of central banks
Dr. Yves Mersch turns to the role a central bank can play to secure
banking resilience: “The main contribution
[of a central bank to higher banking resilience] would be to remain
predictable and true to its mandate.”
In addition, Yves says that banking resilience does not require ECB’s
OMT program (Outright monetary transactions are the purchase by the
ECB of bonds issued by an EU member state to provide financial
assistance to such state.) to soften its conditions (namely linked to
structural reforms in the beneficiating country). ”Those
who believe that we will give away conditionality [on OMT] live in
Alice's wonderland and, as far as I know, wonderland is not applying
to become a member state of the Euro area.”
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Dr. Yves Mersch |
Universal banking model
Frédéric Oudéa highlights the positive role the universal banking
model plays for the resilience of the banking sector. In his view, a
universal bank is, because of its diversification, not a negative but
a positive element in the debate about banking resilience.
Practical aspects of regulatory reforms
Reforms of the European banking sector should not overstretch
financial institutions in their capacity to absorb new regulation.
Frédéric Oudéa gives four reasons for this statement:
- The European economy is still stagnant and needs banks to provide credit.
- The transformation of the European banking system towards a more capital market based economy is already a huge challenge for the industry.
- Financial markets usually require banks to anticipate approved regulation, even though it is not yet formally applicable.
- Banks’ shareholders need a decent return on their investment.
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Frédéric Oudéa |
Additional Quotes
James C. Cowles
“Major global banks are already in a position
where they are adopting the provisions of Basel III, adjusting their
balance sheets and business models.”
“When you have finite resources, what you
have to do is to say yourself – I can't be everything to everybody
everywhere. I need to focus my balance sheet and the resources I have
on those businesses and those products in which I have a real
competitive advantage.”
“Bail-in is something that is appropriate.”
Dr. Thomas F. Huertas
“Banks have become much more resilient.”
“Many of us have flown on airlines in
bankruptcy. The objective of resolution plans is to put banks in the
same type of situation so that you can restructure the capital and,
at the same time, have the bank continue customer operations.”
Dr. Yves Mersch
“We have seen national bias in supervision.”
“We have seen protection of national
champions that has lead both to forbearance but also to blunders in
supervision.”
“We have seen excessive flexibility [in
European banking supervision].”
Frédéric Oudéa
“The big crisis has come, at the end of the
day, from residential mortgages.”
“The structure of banks – for us – is not
at the heart of resilience.”
“The quality of supervision is absolutely
key.”
“Markets do not tolerate graduate
implementation.”
“In the regulatory agenda today, we should be
careful not to add too much regulation that sometimes contradicts
itself and of that we are sometimes not sure about its impacts.”
“If shareholders of banks don't get a decent
profitability, banks will not be resilient.”
“You can imagine a splendid car with very
thick doors and huge airbags, but which cannot move forward because
it has no gas. Let's make sure that the car moves forward at a decent
pace.”
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