"I had a discussion
with a very senior regulator recently who told me: Look,
I know weve gone too far too fast on some of this and
that weve made some errors, but Im afraid I
dont know how to stop this process. Now thats
Thats quite an
understatement from a senior banker, who spoke to Euromoney but
asked not to be identified. But it speaks to a new crisis
facing the global financial markets: the
relationship between banks and their regulators is
increasingly strained. And that is in large part because the
regulators simply cant agree with each other.
The banker continues:
"Remember that regulators and supervisors do not speak with one
voice and nor do they all share the same attitude. Some are
still in the mood to be very tough on regulating the banks and
to proceed as quickly as possible. Others are growing
increasingly afraid that the much talked about unintended
consequences may be upon us. It is hard to say right now which
group is going to win that battle of opinion."
Its a vital battle
at a critical point. The uncertainty is killing not just banks,
particularly in Europe, but their fragile economies as
At Davos in late January,
Michel Barnier, European commissioner for internal market and
services and a driving force behind the re-regulation of the
European banking and financial system, struck a conciliatory
note over one of the key remaining steps to be taken:
establishing resolution mechanisms for failing banks that would
see bank bondholders taking losses rather than being protected
This has been a key call
in the reform agenda across countries worst hit by the banking
system crisis of 2007-09. Never again should taxpayers pick up
the bill for saving failing banks.
While it is eminently
sensible that bondholders should take their lumps for providing
credit to poorly run and excessively risky banks, the public
consultation over the proposed European framework for managing
bank crises appeared to contribute to a destabilization of the
bank funding market last year.
of the procedure for being bailed in at the whim of a regulator
and fearful at a time when all banks were sitting on
potentially life-threatening exposures on the very sovereign
bonds these same regulators had required them to accumulate in
their liquidity buffers, rebelled. They simply stopped buying
bank debt. The banking system trembled. Starved of market
funding, banks quickly began to de-lever, selling assets and
not renewing positions that had been funded in the wholesale
As the New Year dawned,
European Central Banks provision of unlimited three-year
liquidity against a wide range of dubious collateral
prevented the banking system in Europe collapsing.
Now, as markets grappled
with the protracted negotiations over
a second Greek bailout that does little to restore that
countrys finances to sustainability and took fright at
potential contagion to other sovereign bond markets threatening
more European banks, Barnier conceded the time was not right to
press ahead with the bail-in legislation amid such uncertainty.
The outline was ready, but implementation would be delayed at
least while the Greek crisis played out.
At the same time, it
became clear that regulators were re-examining the definitions
of liquid and secure instruments that banks must hold in their
liquidity buffers, so potentially allowing a reduction in their
concentrated exposure to sovereign debtors with possibly
unsustainable finances. Instead, other instruments might be
allowed in liquidity buffers, including whisper it
asset-backed securities which, away from sub-prime
have performed well.
Huw Van Steenis, banks analyst at Morgan Stanley, returned from
Davos hopeful that even if bank regulators are showing no
appetite for forbearance on higher capital requirements, they
might soften their demands on banks elsewhere.
Huw Van Steenis, Morgan Stanley
He notes: "If there will
be a long-term rethink it will be about liquidity ratios, where
assessment of what should be in the liquidity buffers is likely
to be widened. The eurozone sovereign crisis has caught
regulators off guard and we think covered bonds will be
included. We also think the haircuts on corporate deposits in
the net stable funding ratio, which we see as poorly
calibrated, may also get reviewed."
At the start of February,
the ECB confirmed a renewed tightening of bank lending
conditions in December 2011 and January 2012 in a survey
after the first three-year Long-Term Refinancing Operation.
With banks blaming higher costs of funding, reduced access to
market liquidity and balance sheet constraints as well as the
continuing euro area sovereign debt crisis and poor
macroeconomic outlook, it seemed a turning point might be
For a moment, it appeared
that banking regulators might be ready to pause, reflect on the
substantial progress they have already made in forcing banks to
increase capital and reduce risk, and consider if pressing
ahead with re-regulation of the banks now might risk becoming
far too pro-cyclical a policy amid a renewed economic downturn
characterized by fiscal austerity, bank deleveraging and an
interminable sovereign debt crisis.