Barclays Bank, Global Head of Regulatory Policy
David Wright, President, Eurofi
David Wright announced that he and Tom Lodder would discuss global markets and cross border investment. Broad, deep and harmonised capital markets are a positive force. They connect the providers of capital with its users; direct savings towards investments; help economic actors manage their risks; and ultimately power our economies. Fragmented, disjointed and sometimes conflicting regulatory policy benefits no one but global markets can only be maintained if we continue to work towards global standards with regulators and resolution authorities working in an atmosphere of trust.
He asked how Tom Lodder sees the current world: whether he perceives disruptions to cross border financial activities; whether he feels the effects of the alleged rising protectionism; what concerns he has regarding fragmentation, and how he perceives its impacts across the European economy.
Tom Lodder, Managing Director, Head of Regulatory Policy, Barclays
Tom Lodder responded that he sees numerous threats to global markets and cross border flows, and the geopolitical tensions overspill into markets. In that context, he appreciates Sharon Bowles’s comment to ‘Take the politics out of markets’; it is ambitious, but aspirational.
In regulatory terms, Europe is moving from a shared post crisis agenda into one where there is much less alignment from a regulatory and political perspective, in terms of outcomes. This sets the stage for markets to become the arena for figuring out competitive advantage, which provokes a concern, and it is happening at a time when markets are particularly fragile. It is unclear why this is, and what is the cause of reduced liquidity in certain markets, but Barclays certainly sees the impact of increasing capital levels on its ability to service certain markets, jurisdictions, clients and products. Global banks are rationalising what they do in an attempt to deal with this new environment.
These banks are also subject to considerable pressure on the regulatory side, because such pressure fragments their operating models and potentially their booking models. There are regional issues as well as pre existing national requirements in terms of structural arrangements. There are banks supporting global markets in a way that has substantially changed, which means that the markets themselves are potentially more fragile. The sentiment that banks should ring fence or consolidate capital or liquidity within national boundaries works against the need for global harmonised markets, which provokes a concern.
The upcoming regulatory agenda in Europe is a primary concern for Barclays. Barclays are currently looking at issues such as the ability to maintain waivers from solo capital and liquidity requirements under the CRR, and an appropriate balance between home and host authorities in terms of capital, liquidity and resolution. They have concerns about things like the Intermediate Holding Company (IHC) proposal in CRR which would require non EU banking firms to establish a holding company in Europe potentially including existing branches. There are other issues, as well. At a more granular level, one issue is the calibration of regulatory reforms, which needs to be done carefully. This is why the banking industry is cautious about its approach and advocates the appropriate changes collectively, as an industry, because they do not really know what the product by product impact of regulatory measures like the Fundamental Review of the Trading Book (FRTB) and net stable funding ratio (NSFR) will be. The testing and methodologies are still incomplete. BCBS is working in the background on improving the methodologies and calibration, so it is a work in progress; In other words, It is an area where caution is urged in relation to the ultimate outcome in Europe because there are potentially significant impacts for certain sectors of the market.
Beyond this a range of market specific reforms also give Barclays cause for concern. There are indeed significant structural issues for them in certain markets, and much uncertainty. For example, the upcoming derivative trading obligation under MiFID2, without an appropriately early equivalence decision for US trading venues, creates a material problem for a significant portion of the global swap markets, which are supported by European banks, subject to these requirements. In the same vein, MiFID and equity trading venue requirements and the equivalence determinations attached to them cause much undesirable uncertainty.
David Wright stated that in theory there is a slowdown in global regulation,. Svein Andresen will say that the agenda is moving towards implementation, so at the global level one would expect some of the problems currently pointed at to be dealt with. He asked whether, looked at from London, countries are trying to ‘play the competitive game’ with regulation, and whether the US is trying to undercut capital for Barclays’ subsidiary in the US.
Tom Lodder responded that the US is manifestly (through US IHC requirements) more defensive in its approach to resolvability, which is not the scenario that he wanted to prevail in terms of home host cooperation globally. The US model is to some degree contrary to the sharing and caring approach that Barclays would like, but the incentives behind it can be understood in terms of the ability to have an effective cross border resolution of a foreign bank.
Whilst Barclays would like to see global standards with the politics removed, no one disputes that they are moving in the right direction towards finalisation of those global standards. There are inherent political debates going on at present, which cannot be ignored. It appears that the various parties are ready to make a compromise on output floors at the end of Basel IV: Europe is having to go a considerably long way to reach this compromise, from 0% to mid 70%, whereas the US is coming down to 75% from a level that is closer to 100% in some cases. Political compromise needs to be made to achieve the right end result, and the European Union support of those international standards is admirable. That is ultimately the way to achieve harmonisation. The important thing is that it cannot be at any cost for European banks. In particular, we have to be very cautious about introducing standards like NSFR in Europe, if they are then not followed up in the US. There is an inherently important political angle to that. Consistent implementation of global standards is essential.
David Wright stated that there is a problem with the level of implementation. Despite the best efforts of various stakeholders, there is no enforceability of global standards. If even handed implementation is desired at the global level then the global standard setters need to be strengthened and given enforceability powers. However, few people want to support that, and certainly not in the US.
Tom Lodder agrees, noting that there always needs to be a degree of sensitivity to the specific case in hand, and this becomes more difficult when extended to national or regional exceptions.
David Wright explained that there is a slowdown of rule making at the global level with uneven implementation, compounded by the evident political risks. One, which was not mentioned, is the undermining of the World Trade Organization (WTO). If that happens, there will be more heightened political risk. He asked whether Barclays are worried about that.
Tom Lodder responded that this is a developing situation. Barclays have become more expert in trade and WTO issues since Brexit has arisen as a concern. Changes at a WTO level will initially impact clients. The WTO is also important in terms of financial services. Barclays have seen where the WTO’s strictures can create issues: a financial services agreement between Europe and the UK would potentially be easier to achieve without those strictures, but one can see the advantage of having that overlay.
David Wright asked Tom Lodder to outline some measures that would improve the attractiveness of Europe for inward investment.
Tom Lodder responded that following the Brexit result, people have started to look at the UK and consider whether it is where they want long term investment. The Brexit result taught Barclays much about what their clients, customers and the wider economy value in terms of inward investment. Political and legal certainty, and tax and regulation are on the list. Not all of these can be relied upon, in terms of making the UK and Europe attractive.
Harmonisation and the CMU is the right goal in terms of attracting wider investment. Fewer barriers to competition will also attract investment. Barclays are looking at the regional or national issues that may cause concern.
David Wright noted that he has recently seen Philipp Hildebrand of BlackRock say, in the Financial Times, that he is rather bullish about the European economy. Putting aside the issue of Brexit, he asked whether Barclays saw some ‘green shoots’ in the European economy.
Tom Lodder responded that there is the potential for ‘green shoots’. Barclays certainly believe that the increased certainty that will result as the political process is worked through will improve this environment.