EU registration: 5897733662-75
Consultation by the High-level Expert Group on reforming the structure of the EU
banking sector: comments by the British Bankers’ Association
The BBA welcomes the review being undertaken by the High-level Expert Group and the
opportunity to input views into the group’s thought process. The BBA represents 220 banks
from 50 countries on UK, European and international banking issues. In addition to setting
out our views briefly below on the banking questions we have contributed to the submission
made by the European Banking Federation on behalf of the EU banking community.
Before turning to the individual banking questions we would observe that we are supportive
of the criteria for banking reform outlined in the group’s mandate:





Reducing the risks of the banking system as a whole;
Reducing the risks that individual firms pose to financial stability;
Reducing moral hazard by making market exit a viable option for the largest and most
complex institutions thereby reducing government guarantees;
Promoting competition; and
Maintaining the integrity of the single market.
Each of the criteria, and the objectives which they imply, are consistent with the overall
aims of the reform programme being taken forward under an international and European
umbrella. A key consideration for the Expert Group, however, must be the degree to which
measures already agreed achieve the degree of assurance sought on financial stability and
the extent to which a further effort is needed to achieve agreement on proposals which
remain under discussion. The BBA views the measures contained within the prospective
EU Directive on Crisis Management as being of singular importance. This proposes a panEuropean approach to recovery and resolution planning, stronger supervisory crisis
management coordination and the introduction of a 'bail-in' regime for senior creditors on a
common EU platform. Full adoption of all these measures should not be viewed as
assured.
The Expert Group additionally asks whether further structural measures are necessary or
advisable at an EU level. In this regard, we would observe that the circumstances of the 27
Member States are not directly comparable and what may be right for one may not be right
for another. This is a constant challenge for the European Commission in its determination
of measures which it considers appropriate to recommend at a European level.
A key question also is whether additional structural measures would add or detract from the
ability of the European banking industry to concentrate on the task in hand of repairing
balance sheets, working within a stronger risk management and banking supervision
framework and enhancing their prospect of supporting growth in the European and
worldwide economy. From a UK perspective, the BBA fully appreciates that ICB ringfencing will be enacted and we are working with the UK Government and regulatory
authorities with the aim of getting the detail right. But we would not necessarily view this
approach, or an EU statutory equivalent to the Volcker Rule, as necessarily being relevant
to all deposit-taking institutions within each Member State.
D:\116101135.doc 12 February 2016
2
The challenge for the Expert Group is how best to balance the need to take a near and
long term view of the stability measures deemed necessary without compromising the
ability of the EU banking industry and financial services generally from supporting the
broader economy. We have not sought to answer the questions addressed to bank
customers, but would underline the point that services viewed as falling within ‘investment
banking’ such as hedging, foreign exchange and trade-related services are integral to
providing an integrated banking service to corporates and SMEs. This is particularly
relevant given the increasing appreciation of the difficulties involved in restoring economic
growth within the European economy.
The BBA strongly believes that the Expert Group should exercise its influence by endorsing
measures requiring a further push at an EU level: Recovery and Resolution Plans (RRPs),
supervisory coordination on crisis management and the introduction of a clear EU-wide
resolution framework.
To what extent are the current and ongoing regulatory reforms sufficient to ensure a
stable and efficient banking system and avoid systemic crises?
The Expert Group has been convened at a point in time when G 20 Governments, the
Financial Stability Board and the various regulatory authorities working in coordination with
these are substantially advanced in the completion of a banking and financial services
reform programme designed to reduce the prospect and impact of failure within the banking
system. Key measures relate to:
Capital and liquidity: strengthening the quantity and quality of capital. Substantial
increases under Basel III -and CRR and CRD 4 – with minimum requirements to be
supplemented by a capital conservation buffer, a further surcharge on large and complex
organisations – bringing minimum Tier 1 capital to 9.5% - and a countercyclical buffer of up
to 2.5%; also the introduction of a Leverage Ratio as a backstop and a greater emphasis
on stress testing. Also, the introduction of two new liquidity standards in the form of a
Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR). A review of capital
within the trading book is currently underway. These changes are fundamental in scale and
when taken together with the prospective addition of bail-in debt place banks on a
substantially different footing to where they stood pre-financial crisis.
Crisis management: a number of regimes, including the UK, have put in place a statutory
regime enabling the exercise of a number of tools to enable an orderly resolution of a failed
institution to take place pre-insolvency; in the UK this intertwines with the FSA’s Proactive
Intervention Framework (PIF), the preparation of RRPs by individual institutions and the
planned introduction of measures aimed at further enhancing primary loss absorbing
capacity, including through the introduction of a ‘bail-in’ regime for bondholders and senior
creditors. The planned Crisis Management Directive is crucial in this regard.
Deposit guarantee schemes: many jurisdictions, including the EU, have raised
substantially their deposit guarantee limits, additionally removing co-insurance on the part
of the depositor, and have improved the efficiency with which their deposit guarantee
schemes could make compensation payments.
Banking supervision: Many jurisdictions have taken the view that banking supervision
needs to be more intensive than had been the case in the period directly preceding the
financial crisis. This includes the adoption of a more judgement-led, strategic approach and
a strengthening of cross-border cooperation. At an EU level this has been supported by
the formation of the European system of supervisors and will be underpinned by the
D:\116101135.doc 12 February 2016
3
adoption of a single rulebook to be drawn up by the newly-formed European Banking
Authority.
Macroprudential regulation: the UK is in the process of establishing a Financial Policy
Committee within the Bank of England with responsibility for deploying macroprudential
limits on the banking system and monitoring risk within the financial system as a whole. At
an EU level, the European Systemic Risk Board has been given a more limited mandate
but will have responsibility for assessing system-wide risk in a way which ties in with
enhanced oversight envisaged under the EU’s Shadow Banking initiative.
Corporate governance and risk management: banks have substantially strengthened
their corporate governance arrangements and in some jurisdictions, including the UK,
greater emphasis has been placed on risk management through measures such as the
establishment of a Board-level risk committee and the appointment of a senior,
independent Chief Risk Officer (CRO).
Market infrastructure: There have been substantial improvements in market infrastructure
and transparency through encouraging derivative trades to be centrally reported and/or
cleared through central counterparties. These measures will reduce counterparty risk and
interconnectedness between financial institutions.
Other regulatory reform changes relate to credit rating agencies, hedge funds, securities
markets and other aspects of governance, including accounting and auditing.
We view the initiatives outlined above as forming the core of a radical and far-reaching
reform programme and view this as providing an appropriate and sufficient means of
ensuring a stable and efficient banking system and the means by which to insulate the
financial system from future systemic crises. These reforms will dramatically increase bank
loss absorption, substantially increase bank resolvability, reduce avenues of contagion,
radically shrink the implied public subsidy and improve bank supervision.
Which structural reforms would improve the safety and efficiency of the banking
system in the EU in the near term? In the long term?
In our assessment the key components of a stable and efficient banking system must
include (i) strong governance and risk management practices in banks, (ii) effective and
proportional supervision, (iii) sound but measured micro-prudential standards that are riskbased in nature, (iv) recovery and resolution planning and (v) an appropriate level of
macro-prudential oversight. In the EU all of these reforms are currently either in the
process of being implemented, or in the case of the crisis management framework, due to
be announced shortly. Getting these policies right should be the focus for policymakers.
Adding further requirements in our view risks a loss of focus on measures vital to the
banking reform programme.
Progress can be made over the near term on the development of RRPs and also on
making improvements on cross-border cooperation between the supervisory authorities;
the development of an appropriate bail-in regime however will require time for intricate legal
changes and also a period of time for banks to build up the capital position envisaged.
It should further be added that there is no empirical evidence to suggest that universal
banks contributed to the financial crisis and, for that matter, diversity should be seen as
providing insulation from a more catastrophic systemic risk. The experience of the most
recent crisis was that risky business models failed within retail, universal and investment
banks. It is also evident that size did not have a bearing on sustainability since both large
and small banks failed.
D:\116101135.doc 12 February 2016
4
It also needs to be borne in mind that in the near term there are significant risks associated
with seeking to undertake a reform of the structure of the European banking sector given
the scale of the economic crisis gripping the Union at a time when banks are already
concentrating on the most significant reform measures in decades. Risks associated with
structural reform will persist even after the current crisis subsides. Policymakers should be
seeking diversity in the banking sector. Structural change could easily result in the creation
of a large number of similar banking groups displaying similar risk profiles and correlations.
For internationally active firms, it is critical that national supervisors cooperate to
collectively manage the impact on global systemic risk rather than safeguard national
interests. Structural reforms risk promoting a more protectionist approach and will diminish
universal banks’ abilities to support international trade, capital flows and economic growth.
What are your views on the structural proposals to date (E.G. US Volcker Rule, UK
ICB proposal)? What would be the implication of these proposals on your institution
and the financial system as a whole?
The Volcker Rule is based on the simple proposition that deposit-taking institutions should
not be allowed to proprietary trade nor hold investments in certain activities. The UK ICB
proposal, on the other hand, aims to introduce a retail ring-fence based on ‘mandated’,
‘permitted’ and ‘prohibited’ services underpinned by legal and economic constraints. It is
therefore wider in scope than the Volcker Rule, but involves a measure of pragmatism
aimed at recognising that particular financial instruments can be used for a variety of
economic purposes and that this needs to be recognised if a banking group is to combine
respect for ring-fence principles with meeting client (and its own treasury and risk
management) needs.
In respect of the Volcker Rule, it is not the principle that has presented the difficulty but the
formulation of the detailed rules required to give it legal effect. Regulatory pressure to
reduce proprietary trading has and is being driven by Basel II and III, by further forthcoming
changes to trading book rules and through increased regulatory scrutiny on banks’ internal
models among other regulatory reforms. We consider such a risk-based approach
potentially to be as effective as the US regime since it would build on the Basel regime
which fits more naturally with the culture of European risk management and banking
supervision.
The ICB proposals essentially involve the division of banking and financial services activity
by legal entity on a going concern basis in addition to putting in place a structured RRP
based on divisional or functional activity. It constitutes a more fundamental structural
approach than recovery and resolution planning and goes significantly further than relying
upon institutions being able to display to their banking supervisors that they have organised
themselves in such a way that would allow them a) to reorder their business in order to
overcome financial difficulties encountered and b) to permit an orderly resolution by the
authorities in the event that recovery did not enable the bank to return to a stable financial
platform. The draft Crisis Management Directive is expected to include powers to remove
impediments to resolvability; a question for the Expert Group to consider is whether these
bespoke structural interventions should be viewed as a better alternative to mandatory ringfencing.
The ICB report has two integral parts: its ring-fencing proposition and its recommendations
for increased primary loss-absorbing capacity. The latter ties into the ‘bail-in’ proposals
being developed by the EU Commission and is supported in principle as an appropriate
means of increasing the resilience of individual institutions and the financial system as a
whole. While we are working with the authorities to bring UK ring-fencing into effect, we are
unaware of any comparative cost/benefit analysis in respect of the incremental benefit over
what can be achieved through thorough recovery and resolution planning undertaken within
the suite of other risk-orientated measures being taken forward by international agreement.
D:\116101135.doc 12 February 2016
5
We would also note this parallel work in the bail-in area as an example of where
coordination and peer review over and between national crisis management and structural
reform regimes is required. It would be unworkable, for example, to have a UK-specific
minimum bail-in requirement tied to an RWA-measure, while a Europe-wide regime utilises
a gross-liability based target. Similarly, if ring-fencing requirements (either Volcker Rule or
ICB based) are applied only in certain jurisdictions, then the prospect of supervisory
arbitrage must arise. While both the BCBS and FSB have talked of such international
coordination of crisis management regimes there is little concrete evidence of it as yet.
What are the main challenges of your financial institution as regards resolvability?
Are you implementing structural changes to your institution in the framework of your
recovery and resolution planning?
The larger UK banking groups are substantially advanced in terms of preparing their
detailed RRPs in conjunction with the FSA. They face an extended period - in the region of
five or more years - for UK ring-fencing arrangements to be given statutory and regulatory
definition, for regulatory authorisation of new entities to be given and for millions of
accounts and contracts to be reassigned or written according to the new arrangements.
This will be a resource-intense process and will require the utilisation of substantial senior
management and Board time.
Recovery and resolution planning involves the charting of the inter-relationships between
different financial service activities within a banking group and the drawing up of legally
enforceable service level agreements in respect of core support services showing the way
in which a group's businesses could be supported operationally in the event of activities
being separated or discontinued. Ring-fencing takes this one step further by requiring the
organisation of client business by legal entity according to the 'mandated', 'permitted' and
'prohibited' model underpinned by legal and economic requirements, including the
appointment of a separate, independent Board for the ring-fenced bank. It requires the
reassignment of millions of accounts and contracts, including not only customer-facing
contracts, but a reorganistion of employee pensions and tax obligations currently subject to
joint and several liability. This is a resource-intensive process.
It should be noted that some of the major challenges to resolvability are system-wide rather
than bank-specific, and national regulators will need to take the lead in tackling issues such
as the continued operation of payment, clearing and settlement systems in the event of one
or more participants being in resolution.
British Bankers’ Association
1st June 2012
D:\116101135.doc 12 February 2016