Regulation: Bowles targets unfinished business
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Regulation: Bowles targets unfinished business

EP chair presses on with regulatory proposals; seeks parliament’s oversight of ECB.

Sharon Bowles, chair of the economic and monetary affairs committee of the European Parliament since 2009, is bankers’ number-one enemy.

She spearheaded the Capital Requirements Directive (CRD IV), which includes the Basle III requirements in member states, as well as the Bank Recovery and Resolution Directive (BRRD), and was influential in pushing for a ban on naked credit default swaps, the financial transaction tax, stricter tax and capital requirements on hedge funds and private equity groups, and the tightening of EU state aid rules for financials, among other things.

The Liberal Democrat MEP for southeast England now cites unfinished business: killing off the concept of too-big-to-fail banks, fixing holes in bank-resolution plans, addressing regulatory turf wars, and ensuring oversight of the European Central Bank as it assumes extraordinary supervisory powers next year.

In an interview with Euromoney, she says: "Although the European Parliament in the end did not vote for a super-Sifi surcharge [a proposed 10%] and has gone in line with the Financial Stability Board’s recommendations [an extra 1% to 2.5% of core tier 1 capital], Sifis are set to pay for an insurance premium and it might be an incentive for banks to downsize to a lower Sifi given the attraction of having to hold less capital."

Bowles makes a bold claim: markets and policymakers are increasingly prepared for the collapse of a large cross-border universal banking group without triggering a financial Armageddon akin to the post-Lehman maelstrom.

"The chances of some big bank in Europe failing, where everything is disorganized, is progressively getting less and less likely. There is a general agreement about bail-in legislation. We are getting into a situation where banks are submitting group-resolution plans to authorities."

Sharon Bowles wants greater oversight of the ECB
Sharon Bowles wants greater control of the ECB

Regulators, however, have a credibility problem. Although rating agencies note the lack of political appetite to socialize financial losses, the big-three raters still, almost mechanically, upgrade large banking groups on the back of implicit sovereign support, while spreads on senior unsecured bank bonds have not materially repriced on the back of extra credit risk, even after the Cyprus bail-in sped up banking-union efforts and the BRRD legislation. What’s more, Denmark, the Netherlands, and Sweden have introduced the BRRD at the domestic level, without triggering a downward ratings spiral of their banks, while the reluctance of Dutch policymakers to enforce a bail-in of senior debt at SNS bank in February 2013 highlights policymakers’ fears over the market fallout of using all the resolution tools at their disposal. Bowles says governments should have limited flexibility in using the senior bail-in tool to boost ex-ante clarity on creditor hierarchy. Although the bailing in of junior bond holders and 8% of a given banks’ total funds and liabilities will be a prerequisite of EU state aid rules under BRRD when it becomes operational, possibly as early as 2016, some analysts note flexibility with respect to the bail-in of senior bondholders in the resolution text.

This ambiguity appears to confirm investors’ fears that bank resolution will always be effectively a game of second-guessing regulators’ intentions, rather than having ex-ante rules. "The parliament is much more wedded to having a presumptive path, whereas the member states, treasuries and supervisors are looking for a lot more flexibility," says Bowles. She adds: "Cyprus was a bit of a disaster because they kept on changing their minds. We need clarity."

Bowles says challenges, including different corporate bankruptcy codes, still undermine the banking-union project. "It’s still very difficult that even under a banking union, a bank will have assets owned in different member states and we still don’t have tools that can command the transfer of those assets from one country to another."

Bank resolution plans remain a work in progress, but have been complicated by the push among some European supervisors to ring-fence liquidity and capital within domestic borders, and divergent structural banking reform proposals in the UK, France and Germany.

Bowles holds out little prospect for harmonization of bank-structural reforms in the near future. "We have not had the proposal on bank structures from the [European] Commission. There is no hope of that happening anytime soon. There should be an overriding principle that whatever reforms you embark upon, it should not damage the common market. In other words, you should not ring-fence within the EU, but perhaps ring-fence EU banking groups," she says, raising the spectre of an EU/US regulatory spat.

Bowles describes the fragmented regulatory backdrop of an upcoming Federal Reserve surcharge on large foreign banks’ US operations and swap rules that favour US operations. "We are fighting back against the US for the EU’s interests on a couple of regulatory matters," she says. "But although everyone is complaining about turf wars, in truth, regulators have never cooperated globally on this scale before."

Bowles says: "Heads of US agencies are also political appointees, and there is rivalry between the agencies. Sometimes it can be a nuisance and sometimes it can be competitive for regulatory agencies."

Bowles, who was short-listed as a candidate to become Bank of England governor last year, says US regulators submitting to political oversight boosts transparency, serving as a lesson for Europe as both the Bank of England and ECB address the challenge of fulfilling regulatory and monetary policy objectives with ever-more-powerful mandates.

"The EU parliament should be a thorn in the side of the ECB," she says. "We don’t have a competitive regulatory landscape. I think we will look to conduct more meetings, hearings and dialogues with supervisors with both the BoE and ECB."

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