Thursday, October 17, 2013

“Banks have become much more resilient.” – A debate about banking reforms and their impacts


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.


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.


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.”


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.

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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