Angela Knight speech in Paris on capital requirements and international regulation
British Bankers' Association seminar â€“ The Future of the European Banking Industry
Opening marks by Angela Knight, Chief Executive, BBA
1500 CET, Monday 13th September 2010
First of all can I welcome you all here this afternoon and thank you for coming to this seminar.
To give you some background: we are, as you know, working in an environment in which banks continue to be the focus of both political and regulatory attention. Whether it is our local authorities, our regional authorities or the international authorities, all are making changes and have more proposals for more change, both to the way in which banks operate and to the framework in which they operate.
At the same time, there are questions that still remain to be fully addressed. What is macro prudential supervision? How should it operate? And it is really macro economics that we are looking at? That topic will be covered in this afternoon’s seminar, as will the capital and liquidity changes flowing from Basel decided at the weekend. Again we will be looking at some of those specific measurers later.
However, whilst they are specifically addressing long term stability in those proposals and indicate that once they have been implemented their long term adverse impact on economic growth is modest, the transition period is very critical indeed.
Basel is often categorised only as the amount of capital that a bank should hold. Indeed this is a very important part. The new liquidity requirements though are of equal importance. And what should not be forgotten either is the myriad of technical changes which collectively will have a significant impact on a range of economic issues from, for example, the much higher cost of overdrafts to businesses, through to impediments on vital aspects of the wholesale market.
It is very easy to call for quick timetables. Should this be the requirement though, the ability of the industry to finance economic recovery would be dramatically impeded. It is essential that the transition period not only takes place over a timescale, but also in a sequenced manner that ensures that the economic recovery is not impeded.
We believe this will mean that from a practical perspective, following each change an assessment is made of the impact of that change both on the economy and on the industry, and alterations where necessary made. Only then is the next change introduced.
At the same time there needs to be recognition that whilst the overall quantum may seem appropriate, some banks may well be affected more than others. The regulators will need to look at this carefully.
The CRD4 package [the fourth package of amendments to the EU Capital Requirements Directive] will be a test of this, as it puts the Basel requirements into law across Europe. We are probably the only region that will be implementing Basel in this way and further we have to recognise that many countries will not actually be implementing some or all of its requirements.
We are being closely watched on this. Competitiveness locally, regionally and internationally is vital for our people and our economies. So for us in Europe it’s not just about Basel but it’s also about CRD4.
I trust that today there will be consensus on some of these points.
The new EU supervisory authorities
Turning to specific European questions, I welcome the potential for better coordination between the EU countries and the role that the new supervisory authorities can play in harmonising rules, colleges of regulators and in crisis situations.
Internationality and the EU
We all recognise though that the major banks of Europe operate in many countries of the world. And although it is easier to think of “cross border” activity as meaning from one European country to another, and this may be the case for a great many, for the large banks “cross border” can mean any country in the world.
We have the great good fortune and the great economic benefit of having the “Europe, Middle East and Africa” headquarters of multi-national corporations here in Europe and not in those other two regions. As the new structures in Europe develop, internationality needs to be part of the focus. From this flows two requirements. The first is it is vital how the interface between the EU and the rest of the world is tailored; and the second is that the rhetoric must be outward looking, creating assurances that the change programme in Europe will be well crafted and welcoming.
The banking industry and policy making
At the BBA and with our members we consider that the banking industry should take the lead in providing solutions and strategies to the big questions of the day, obviously working with authorities in an open and cooperative way. It is after all the industry which knows most about the industry. So creating our own future is better than leaving it to others.
This in turn brings forward the need to provide some sort of answer to those questions, such as how does one deal with a big bank that gets into difficulties? In the UK we are of the view that a bank should be allowed to fail, but the manner in which that failure is managed and controlled is where more work needs to be undertaken. What should be in a recovery and resolution plan? What are the sort of resolution tools and resolution funds that authorities require? What role is there for contingent capital and bail-in mechanisms and what are the investors’ views on all this?
Restoring the reputation of the financial system and the banking industry is clearly necessary. Although it was only a few banks that got into difficulty, we are all captured by those failures, the hostility of our people and the changes that are being made. It is difficult to describe the importance of banking to people; the language is difficult and the language is complex, but a vibrant effective and profitable banking industry is essential for any modern economy.
Improving the reputation of the industry is as much a part of the future as making the practical changes to our capital ratios.