Banking StandardsWritten evidence from Barclays Bank
Summary
1. The reforms recommended by the Independent Commission on Banking (the ICB), alongside broader banking reform activity in the UK and in Europe, will help ensure that the UK banking system is safe, stable and effective.
2. Barclays is determined to introduce the full range of reforms to a high standard and as soon as possible. The current draft of the Bill offers little certainty about the final shape of these reforms for banks to begin implementation, without having to make material judgements about the future direction of the legislation. Without such judgement, or a material increase in the depth of the primary legislation, and following the current timetable, it is unlikely that implementation could begin substantively until 2015 at the earliest.
3. We recognise that decisions on technical implementation details are most appropriately left to regulators. However, we believe that issues such as the thresholds for customer inclusion and the structural requirements for ring-fenced banks are directional policy matters which should be dealt with by the primary legislative process. At the very least, this will ensure that the objectives of the legislation are carried through in implementation and prevent slippage over time.
4. We commend the Government for their focus on incorporating the relevant aspects of the European policy response and working effectively towards harmonisation, most notably on the shape of the rules regarding “bail-in” debt. We encourage the Government to continue to work closely with the EU process to ensure that the UK and EU reforms are directly and fully compatible. This is particularly important in the context of the recently released recommendations of the High Level Group chaired by Erki Liikanen (the Liikanen Group). Based on the understandable lack of specificity in the latter recommendation, we anticipate material areas where work to ensure appropriate alignment will be required.
5. On many topics covered by this consultation response, we have been unable to give full answers due to the lack of any real specificity in the draft Bill. However, we have identified areas where we believe the Commission could offer advice and scrutiny to enhance and strengthen the drafting and potentially accelerate the implementation process. We would strongly welcome specific detail in the next draft of the Bill on the following areas in particular:
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Objectives and general approach
Question 1. Does the draft Bill successfully give effect to the objectives set out in paragraph 1.3 of Sound banking: delivering reform and is it the most efficient and effective means of delivering those objectives?
6. The objectives set out in paragraph 1.3 are an accurate description of the objectives of the wider public policy challenge of banking reform, of which the Banking Reform Bill is a fundamentally important aspect.
7. As an example, the challenge of ensuring banks are more stable and better able to absorb losses is being largely addressed through the Basel process, the European Recovery and Resolution Directive, and the Recovery and Resolution Plans UK banks have already submitted to the authorities.
8. This Bill should be seen within this wider context, and care taken that the Bill does not contradict, or become superseded by, other reforms and that no underlap or insufficiencies are created.
9. At this stage the draft Bill does not give sufficient clarity or certainty on any of the major issues to have confidence as to whether it will meet the objectives set out for it. We recognise that the technical details of implementation are most appropriately left to the regulators. However, we believe that issues such as the thresholds for customer inclusion and the structural requirements for ring-fenced banks are directional policy matters which should be dealt with by the primary legislative process and are disappointed that the draft Bill provides no certainty on these matters.
10. We do believe that the Banking Reform Bill and the wider bank reform process have the potential to significantly address the shared objectives for a safe, stable and effective financial system, but the achievement of those objectives risks being delayed by the lack of certainty around the way in which the Government wants banks to change their business and operating models to deliver them.
Question 2. Do any of the recommendations of the Independent Commission on Banking (ICB), which the draft Bill seeks to implement, need revision as a consequence of developments since the ICB’s report?
11. The most significant areas of interaction with other policy activity are with the Recovery and Resolution Plan (RRP) process in the UK, and with the Recovery and Resolution Directive, Liikanen and Banking Union processes in Europe.
12. The RRP process requires banks to set out recovery plans for dealing with financial stress, and resolution plans to explain how they could be resolved in the event of a failure, and help the regulators develop a presumptive path to resolution for each firm. This project has been detailed and rigorous, and we are hopeful the plans will be effective. We would advise the Government to avoid inflexible structural requirements which may contradict these plans. In Europe, the proposed RRD should create a common framework for resolution regimes within the EU. In particular, we support the Government’s decision to implement the RRD bail-in proposals, as an effective way to preserve the critical operations of a large and complex bank, while minimising the systemic consequences and without reliance on taxpayer funds.
13. The process by which the EU responds to the recent recommendations of the Liikanen Group is of significant concern. In the notes which accompany the draft Bill, the Government state that they expect the Liikanen recommendations to be compatible with the Banking Reform Bill. However, we believe that there are a number of areas where the implementation of those recommendations could deviate materially from the Government’s intentions with respect to the ICB’s recommendations, even where there do not appear to be direct contradictions. The Liikanen proposals will need themselves to be implemented by EU legislation. Even if the general proposals that have been advanced by Liikanen are not believed to be incompatible with the Bill, great care will be needed to ensure that this remains true when these proposals take final legislated form.
14. In particular, the Liikanen Group’s recommendations aim to “separate” trading assets and market making activity, in contrast to the ICB recommendations, which aim to ring fence the assets of smaller customers. The treatment of a number of products, services and customer groups is not specified by either set of recommendations. Depending on how the treatment of these is determined in the UK and the EU, the result could be the requirement for UK banks to create three tier banking groups separated by two differently constructed ring fences. Barclays initial analysis suggests that the most important activities that sit within this indeterminate group include larger clients, interbank lending, loan syndication, wealth management and some hedging services to non-bank customers. It is vital that the treatment of these activities is defined consistently between the UK and EU.
Question 3. Do the powers in the draft Bill and the Government’s stated intentions for their use give effect to the ICB’s recommendations? Are any deviations justified?
15. The decision to leave the design of the ring fence very significantly to the secondary legislative processes means that it is impossible to be certain whether the ICB’s recommendations will be effectively and accurately implemented.
16. The notes and the draft text do however suggest that the final reforms may not be designed with the flexibility which was intended by the ICB, and may therefore not effectively respond to the differing structures and risk profiles of each bank.
17. We highlight three areas of concern in particular:
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Question 4. What should be the timetable for implementation of these measures, and should it be set out more clearly?
18. The legislative timetable the Government intends to follow is clear. However, Barclays believes that the importance of these reforms, and their impact on market and customer confidence, demands faster implementation. We ask the Government to provide greater certainty and detail on the shape of the reforms in the primary legislation, and to work with European policymakers to clarify how interactions will be managed.
19. Barclays wishes to begin implementation at the earliest possible stage and seeks the certainty required to do so.
20. Implementation can be pursued without that certainty but at the risk of creating significant additional cost to the economy.
Question 5. The draft Bill proposes continuity objectives on the PRA and FCA. Are these appropriate and compatible with their other objectives?
21. As noted in more detail under question 9, the continuity objective is a narrow one. We would support a broader set of objectives which reflect considerations of the economic impact and any obvious wider cost-benefit analysis of decisions made.
Banking standards and competition
Question 6. What will be the impact of the proposed changes in the draft Bill on banking standards in the UK more widely?
22. We believe that the ICB reforms, alongside wider public policy activity in the UK, EU and beyond, will be a strong mechanism for creating a safer, more stable and more effective banking system.
23. However, we do not expect the proposals in the draft Bill to address the equally fundamental question of banking standards, as these challenges are behavioural rather than structural in nature, and we do not believe that changes in structure in and of themselves will lead to behavioural changes.
24. Some argue that the “separation” brought about by the ring fence between the retail activities within it and the wholesale activities outside of it will be beneficial. We believe this is an inaccurate interpretation of the source and causes of the banking standards issues that the UK industry needs to address. In particular, well documented and significant failures in industry standards—such as PPI and swaps mis-selling—occurred in the parts of banks that would be allowed within the ring-fenced entity based on the ICB’s recommendations. Furthermore, they occurred in both universal banks, that combine what will be ring-fenced and non-ring-fenced entities, and stand-alone retail banks. This evidence clearly indicates that challenges in bank culture and standards are not a product of cultural contamination between these different entities.
25. It is abundantly clear that public trust in banking standards and behaviours has been fundamentally compromised, and action is clearly required. The reform process, in particular structural reform such as the implementation of the ICB recommendations, will be an important contributor to restoring that trust at the very least because of its impact on perceptions of the industry’s security and stability. As part of this, we believe that banks themselves must play a leadership role in identifying the root cause of the failures of standards, as well as contribute actively to identifying what remediation is required. Barclays has begun an independent review under the leadership of Antony Salz to do just that, the results of which will be made public before our AGM in 2013 and which the Barclays Board have committed to implement in full. We are also undertaking specific changes, for instance redrawing the banks incentivisation schemes, to ensure that customers are at the heart of our thinking at all times.
26. Any such changes from within the industry need to be reinforced by a rigorous, external mechanism. In responding to the Commission’s initial call for evidence on banking standards, Barclays proposed a new professional body for bankers and a professional register from which it would be possible to strike off individual bankers who exhibited behaviour inconsistent with industry ethical norms. While there are many complexities to be resolved in instituting such a reform, we believe that this would make a substantive contribution towards addressing the issue of banking standards and invite the Commission to consider it.
Question 7. What will be the impact of the separation of retail and wholesale banking on the culture prevailing within each?
27. As noted above, we do not anticipate that structural reforms, as envisaged by the ICB or the Liikanen Group, would of themselves have direct implications for the culture of either retail or wholesale banking. Examples of exceptional standards, as well as failures, can be found in standalone retail banks, standalone wholesale banks and in banks that combine both. Changing the behaviour and culture of staff in banks will require much more than structural change.
28. Barclays expects exactly the same standards of honesty, integrity, probity and customer focus from colleagues in every single part of Barclays. It would be wrong to have different expectations from colleagues in any particular part of the business given the systemic implications of the activities undertaken in each.
Question 8. What will be the impact of the ring-fence on competition, both in retail and investment banking, and in other areas of financial services?
29. We anticipate a significant impact on the competitive environment within the UK. The ring fence is likely to introduce distortion of pricing for deposits and lending. Ring-fenced banks would have no incentive to offer competitive interest rates for deposits, either business or retail, as they would have assurance of deposits due to the government mandate. In addition, ring-fenced banks would be at a competitive disadvantage to the non-ring-fenced financial institutions, which will be able to offer higher deposit rates and operate un-burdened by the regulatory and funding cost of ring-fencing.
30. Ring-fenced banks would have an incentive to aggressively lend against cheaply acquired deposits, which would likely distort pricing of loans and potentially encourage irresponsible lending behaviour.
31. There may be implications for the competitiveness of UK banks in the international market place if the ring fencing (or any other material aspect of the ICB’s recommendations) is imposed without appropriate harmonisation with other markets, especially the EU.
Delegated powers and accountability
Question 9. The draft Bill grants a large number of delegated powers to the Government. Are the principles under which delegated powers are to be exercised sufficiently clear?
32. In many instances, these delegated powers are exercisable by reference to the “continuity of core services” objective; for example the power to derogate from the restriction on principal trading, or the power to impose prohibitions such as opening branches or dealing with particular types of entity.
33. The flexibility of this approach is understandable but it generates three concerns:
The “continuity of core services” objective is narrow, and excludes considerations of the economic impact and any obvious wider cost-benefit analysis.
The objective in question is subjective and hard to measure. If the Government acts unreasonably then, absent judicial review it is open to HMT to define its own sense of what is required in order to best maintain core services and how that should be interpreted.
There appears little accountability over the exercise of these powers. The PRA reviews referred to at 142(I) require that the PRA publish the report in the manner it sees fit, which provides a framework for review but not a mechanism of challenge as such.
Question 10. Does the scope of the delegated powers in the draft Bill represent an appropriate balance between flexibility for the Government to respond to changing conditions and accountability to Parliament and the public?
34. Where HMT chooses to delegate authority to the regulator, an Order may, but is not required to, impose conditions on how the regulator will exercise its powers. Again, in the absence of detail, the capacity for a challenge mechanism is likely to be limited. If the regulator’s actions are guided only by the continuity objective, then the opportunity for challenge and careful application of the powers may be reduced. A broader form of impact assessment and scrutiny would be welcome.
Question 11. Is there sufficient clarity about the Government’s intended use of delegated powers, both to enable public understanding and to enable affected banks to prepare for the proposed changes?
35. There is insufficient clarity about the intended use of delegated powers, which reflects the general lack of certainty throughout the Bill. Particular examples are the definitions of activities and services which will and will not be permissible within the ring fence. There is less certainty still about questions related to funding.
36. Barclays wishes to begin implementation at the earliest possible point. We require far greater certainty than is provided by the Bill to do so.
Question 12. The draft Bill provides for review of the ring-fencing rules by the PRA every five years. Does the proposed review mechanism provide sufficient accountability?
37. This timescale appears appropriate, however we are concerned about the objective against which the rules will be constructed and reviewed, as in our response to question 9.
The ring-fence
Question 13. Is the power to be able to exempt certain categories of deposit-taking firms from having to establish a ring-fenced bank appropriate, and on what basis should the conditions for exemption be set?
38. There is an intention in both the Banking Reform Bill and the Liikanen proposals to exempt a significant majority of deposit-taking institutions from introducing a ring-fence. This is a major stability concern.
39. Exempting all institutions with less than £25 billion in deposits would only capture six UK banks1, with building societies in addition. Similarly, the Liikanen Group’s proposals would capture around c10–20 institutions EU-wide, compared to the approximately 6,000 banks within the proposed Banking Union alone.
40. An important lesson from this and previous financial crises is that smaller, less resilient institutions, without the stability and diversification that comes with scale, can very easily be compromised in large numbers by the impact of a shock. In such instances, they become a mechanism of crisis transfer, and an early and public sign of bank failure further worsening a loss of confidence.
41. Many note that the fact that these banks are small suggests that any particular issue that might arise can be dealt with more easily and directly. However, the experience in Ireland, Spain and Greece, to name but three, during the recent crisis highlights that such banks tend to take very similar risks which leads to a very high correlation in their failure rates. As a consequence, the experience shows that the joint failure of a large number of such smaller institutions creates just as much, if not more, financial instability as the failure of a large institution.
Question 14. Is the range of core and excluded activities defined in the draft Bill appropriate and sufficiently broad? Are the Government’s stated intentions for using powers to define further core and excluded activities appropriate?
42. The draft Bill and accompanying policy notes do not provide sufficient clarity or certainty about which activities—or services—will be considered core or excluded to allow banks to begin to design their structures for the purpose of implementation. The inclusion of deposits, withdrawals and overdrafts is consistent with the intention of the ring fence. Exclusion of dealing in investments as a principal is expected and appropriate, but requires clarification from the Government that they do not intend to prevent client intermediation, share dealing on behalf of customers and other activities which are not “proprietary” in a real sense. In these instances, in order to facilitate the transaction, the bank will take the transaction onto its own books before an offsetting sale.
43. The inclusion of “related payments” is concerning. It is unclear from the current drafting whether payment services are to be considered core services or not. We believe that the rules should allow payment services to be provided through an operational subsidiary, providing services to both parts of the bank but bankruptcy-remote from each.
44. Additionally, if related payments is intended to refer to retail payments, this drafting would require splitting—and to a large extent duplicating—payment functions within a bank with no incremental benefits to stability.
45. We would therefore advise that related payments be removed from the list of core activities to allow for greater flexibility in the way that banks manage the technicalities of the payments process.
46. We would encourage any further documentation to clarify the language between selling and manufacturing, as such terms are not synonymous nor are the activities to which each term refers.
47. In considering core and excluded activities, the Commission may wish to consider the distinction between selling/offering a product and manufacturing a product. It may be the case that by offering a product, a bank takes on credit risk that the customer will default. In contrast, by manufacturing a product, the bank may take on additional market risk associated with creating and managing an asset. This would be the case, for example, with derivative products.
There may be examples of where policy makers consider the credit risk associated with offering a product to be appropriate, but would not support the ring fence from manufacturing the same product.
48. Beyond this point, the draft Bill and accompanying notes do not provide sufficient clarity over what will be core, permissible or excluded. We ask the Government to deliver further certainty, and emphasise in particular the importance of ensuring that the final UK position matches the European one.
49. On the question of simple derivatives, Barclays recognises the commercial motivation for inclusion of both manufacturing and distribution within the ring fence from both banks and small business customers. However, we believe that inclusion is counter to the broader intention of the ICB and represents a significant dilution of the objective of the ring fence at implementation.
50. In addition to a general need for greater certainty in the Bill, we would strongly encourage detail in the primary legislation on the following areas:
Thresholds for inclusion within the ring fence—confirmation of the customer thresholds below which businesses and individuals will be mandated within the ring fence.
Funding between entities—confirmation that the non-ring-fenced bank will be allowed to support the ring-fenced bank if required.
Bank Structure—confirmation that banks will not be required to adopt a specific company structure, but will be able to apply to institute a robust ring fence around the appropriate customer groups in a manner appropriate to their specific structure and circumstances.
Principal trading—confirmation that the prohibition on principal trading will not prohibit trading on behalf of clients, such as retail investment in shares.
Depositor preference—confirmation of which deposits will be preferred above other unsecured liabilities in the creditor hierarchy.
Question 15. Which categories, if any, of customer should be permitted to deposit with a non-ring-fenced bank?
51. Barclays supports thresholds for inclusion in the ring fence at £250,000 for personal customers and £6.5 million for small business, which would cover the vast majority (96%+) of UK businesses and 99% of UK individual customers, without compromising the ability of banks to meet client needs. We also support the view that customer needs will be best served by allowing some customers to opt out of the ring fence, if they require access to the services offered by the non-ring-fenced bank. The ICB’s original intention in recommending ring fencing was to ensure that “critical functions” could more easily be protected in the event that either the ring fence or the non-ring-fence parts of the bank fail. Thresholds at this level will meet this intention, without introducing the dilution of size and complex needs that a higher threshold would necessitate.
Question 16. The Government is considering whether to allow ring-fenced banks to offer simple derivatives to their customers. Should they be allowed to? If so, what safeguards would be necessary?
52. On the question of simple derivatives, Barclays recognises the commercial motivation for inclusion within the ring fence from both banks and small business customers. However, we believe that inclusion is counter to the broader intention of Vickers and represents a dilution of the ring fence. If they are to be included as permissible activity, it must not represent the beginning of a piecemeal dilution of the ring fence.
Question 17. Are the proposed corporate governance arrangements between the ring-fenced bank and the wider group sufficient to ensure the independence of the ring-fenced bank? Are these arrangements compatible with directors’ duties and principles of accountability?
53. The ring-fenced bank must have strong governance, as must the non-ring-fenced bank and the Group overall. All financial institutions (and entities within those institutions) must have a strong risk management and control framework, set appropriate tone from the top and have a culture of doing the right thing for customers, clients and society more generally.
54. The key question is how to achieve strong governance across the group in a way that also recognises the unique position of the ring-fenced bank and serves to promote and protect the integrity of the ring fence.
55. Barclays shares Paul Volcker’s concern about independent boards for the ring-fenced bank. Directors act as agents of the company’s owners. We would caution against implementing any governance structures that further widen the agency gap between the ultimate, beneficial shareholders and those who manage the business on their behalf. Installing a largely independent board at ring-fenced bank level adds another link in the agency chain, widening the agency gap, particularly where the ring-fenced bank represents a significant part of the business of a group when taken as a whole.
56. The governance arrangements for the ring-fenced bank should therefore focus on promoting the right behaviours and values and concentrate on ensuring that those governance arrangements function effectively rather than conforming to a set of perceived best practice rules that simply prescribe form and structure. Such an approach will also allow each ring-fenced bank to apply governance arrangements in a way that is appropriate to its own—and its parent company’s—particular circumstances.
57. Furthermore, any question of “independence” needs careful definition to ensure that stipulations are not applied to the construct of the ring fence which are unnecessary in ensuring that it achieves the desired statutory objectives. Barclays believes that the “independence” of the ring-fenced bank should be focused on ensuring that it separately meets its regulatory requirements—both conduct and prudential. The principal obligation of the Board of the ring-fenced bank must be to ensure that those obligations are met and no intervention from the parent company or otherwise should be able to prevent that from happening. Once that objective is satisfied, the Board’s other obligation must be to serve the interests of its beneficial owners in the usual way.
Question 18. How appropriate are the proposed restrictions on exposures and operational dependencies between the ring-fenced bank and the rest of the group? Will these result in a sufficient degree of independence and resilience?
58. This is an area of significant concern. We fully support funding restrictions which prevent the ring-fenced bank being used to fund or recapitalise the non-ring-fenced bank. This restriction is entirely consistent with the letter and intention of the ICB recommendations.
59. However, we see no public policy benefit to preventing the non-ring-fenced bank from funding the ring-fenced bank especially in circumstances where the ring-fenced bank has entered a recovery situation, so long as that support does not in any way cause the non-ring-fenced bank to violate its direct prudential requirements. This activity would serve as a potential rescue mechanism in the event of a crisis and to prohibit such an activity appears contrary to the goals of the ICB.
60. Experience from the crisis shows that the ring-fenced bank is as likely to experience difficulties as the non-ring-fenced bank, and both are measurably less stable than universal banking models. We would propose asymmetric funding restrictions to allow for large universal banks to support their retail arms where required.
61. Within this context, “independence” should be understood as ensuring that both sections of the bank are in complete fulfilment of their regulatory requirements under the reforms, without acting beyond this point to restrain the prudential and economic benefits of the universal banking model.
Question 19. Will it be possible to effectively monitor and police the ring-fence, given the degree of regulatory discretion the draft Bill proposes?
62. Barclays has confidence in the current and incoming regulatory bodies and will work with them to achieve the deepest possible regulatory oversight.
63. If the Commission believes that there are deficiencies in the regulatory regime, Barclays would propose that those are fixed at source—ie within the regulatory regime—rather than by imposing incremental burdens within the implementation of the ICB recommendations.
Question 20. How effective will the provisions on corporate governance for ring-fenced banks be in promoting a wider improvement of standards? Should other measures also be considered?
64. As noted in answer to questions 6 and 7, banking standards are not problems which can be addressed through structural adjustments to the shape of banks, but require a broader range of changes within banks themselves.
65. Improvements in governance have an important role to play in both defining, implementing and maintaining those changes. But the imposition of separate governance for a ring-fenced bank, against the same governance standards as the non-ring-fenced bank and parent company will need to put in place, will not—in and of itself—bring about that change.
66. We also invite the Committee to consider Barclays recommendation for a Chartered Institute of Bankers and a professional register.
Depositor preference
Question 21. Is the proposal to prefer insured deposits in the event of a bank insolvency justified? Is there a case for broadening the scope of deposits which benefit from this protection?
67. Depositor preference (DP) for insured deposits would mean ranking the Deposit Guarantee Scheme (DGS) above general unsecured creditors in bank resolution. This would force better market discipline by strengthening the incentive for general unsecured creditors, including senior debt-holders, to monitor banks they have exposure to. Additionally, deposits insured through the Financial Services Compensation Scheme are already protected, so the imposition of depositor preference has no bearing on the outcome for individual depositors. Rather, depositor preference provides greater certainty about from where the funds required to protect those depositors will be sourced, which is to be welcomed.
68. These two benefits of DP are to be welcomed. We are pleased by the Government’s recognition of the need to ensure international consistency on DP, and would encourage particular focus on how the policy will be affected by the final drafting of the EC RRD and the design of the bail-in, given that DGS bail-in is by definition inconsistent with DP. In addition to achieving harmonisation of approach across Europe, we would encourage European policymakers to consider the added challenge of harmonisation with the United States, which has already introduced depositor preference.
69. It is important to note that DP would substantially reduce the need for a pre-funded DGS; because the DGS would only lose money after all general unsecured creditors had been wiped out (on top of equity and sub-debt holders). Removing the need for a pre-funded DGS would help mitigate the expected increase in funding costs to the banking sector.
70. However, the expansion of depositor preference beyond insured depositors would confer a new protection to otherwise uninsured depositors. This seems to us to be a wholly inappropriate outcome. First, it is not equivalent to the insurance protection provided to other depositors, as it will not guarantee payment. Second, it creates a material communication issue with depositors as to the nature of any protection to which they are exposed. Third, in the context of communications, understanding how depositor preference without insurance will work will require significant sophistication on the part of customers. We believe that any expansion of depositor protection should be dealt with best through changes to the relevant insurance schemes and carefully coordinated across at least Europe.
Capital levels
Question 22. Does the draft Bill adequately implement the ICB’s recommendations on loss absorbency requirements?
71. The draft Bill leaves the implementation of absorbency requirement to the European Commission’s Recovery and Resolution Directive (EC RRD) process, which we welcome as a measure to ensure international coordination.
72. However, we note that, in the impact assessment accompanying the draft Bill, the Government set out 17% PLAC requirements and an additional 2% “management buffer”. We believe this buffer to be contrary to earlier Government policy, most notably the White Paper which preceded this draft Bill and seek to have it removed.
Question 23. The draft Bill gives the Government power to direct the way in which the regulators can implement loss-absorbency requirements. How appropriate and well-designed is this power?
73. We understand these powers to allow the regulators to implement the EC RRD proposals, and we welcome them on this basis.
Question 24. Is the Government’s stated intention for the design of loss-absorbency requirements workable? Will it provide a sufficiently well-capitalised banking system? In particular, how justified is the intention to allow an exemption for assets held in overseas operations?
74. In general, the design of the loss absorbency requirements is workable, with the focus on European harmonisation entirely appropriate. However it will be important that the Government provides clarity over the definition of PLAC, and how this will work alongside the EC RRD proposals.
75. Any exemption of asset held in overseas operations must be subject to very stringent tests which require the “host” regulator to state unequivocally that the UK is in no way liable if the entity of the relevant bank needs to be independently resolved and that, in such circumstances, the parent bank cannot take steps to rescue that unit that would in any way jeopardise the overall banking group.
Question 25. Is the Government justified in its decision not to implement the ICB recommendation for a higher leverage ratio than is required by Basel III?
76. Yes. The Basel III requirement is rigorous, internationally harmonised and consistent with the Government’s stability goals.
77. Additionally, unilateral higher ratios will inevitably push activity outside of the jurisdiction, but will not remove the risk of impact on the UK financial system. As the financial crisis demonstrated, banking failure in one jurisdiction will quickly spread to other jurisdictions due to the speed and interconnectedness of modern markets. Losing banking activity to other jurisdictions is therefore both a competitiveness issue, and a stability one.
Resolvability
Question 26. Will the UK authorities have the necessary tools and powers (as a result of this legislation and other initiatives) to be able to resolve a large failing ring-fenced or non-ring-fenced bank, while maintaining financial stability and minimising the risk to public funds?
78. Banking Act 2009 provided authorities with a permanent framework providing tools for dealing with failing UK banks and building societies. The tools outlined in this Bill do not appear to offer incremental benefits beyond those set out in the 2009 Act.
79. The Banking Reform Bill is a part of a far wider policy focus on recovery and resolution. Banks are required to develop recovery and resolution plans and although there is still much to do, we are confident about creating a presumptive path to resolution. Equally, the adoption of a bail-in tool, termination rights and stay considerations, and the expansion of the UK SRR to holding companies through the EC RRD is a positive and necessary step, which will enhance the UK SRR in line with the FSB’s Key Attributes for Effective Resolution Regimes.
80. It is important that these reforms are considered in the round, and each new initiative is calibrated to enhance, rather than supersede existing work, which has not as yet had sufficient time to demonstrate success.
81. We do believe that the reforms as a whole will achieve an end to both the reality and perception of too big to fail, so that banks of any sort can collapse without fiscal impact or counterparty contagion, and with retail depositors properly protected.
Question 27. What is your assessment of the Government’s preferred design of “bail-in” powers needed to improve bank resolution? How likely is it that the Recovery and Resolution Directive will deliver effective bail-in powers?
82. We support the EC RRD’s intentions and policy direction. We outlined to the European Commission four key characteristics which we believe bail-in must achieve:
Clarity—The trigger point should be the same (the point of non-viability) for all resolution tools; the field of liabilities in scope should be clear, and the bail-in powers and process that the resolution authorities have to enact must be clearly defined.
Practicality—the distortive impact of a bail-in should be as minimal as possible for business as usual purposes. This is of particular importance when determining the scope of affected liabilities.
Flexibility—a bail-in regime should be able to deal with the different business models and structures of the instructions in scope.
Consistency—the principles of application should be capable of international agreement. This does not require identical paths, but agreement of general principle of application that do not create material distortions.
83. We are confident that the EC RRD will deliver bail-in powers that achieve these characteristics.
Impact assessment
Question 28. Is the impact assessment of the costs and benefits credible and balanced?
84. Without certainty about the final shape of the reforms, it is not possible to comment with certainty about the impact of these reforms.
Question 29. Might there be any other unintended consequences which have not been considered?
85. We would identify two areas where we believe that unintended consequences counter to public interest may be created by the Bill.
86. First, the apparent prohibition on the non-ring-fenced bank from funding the ring-fenced bank when required as previously outlined. We fully agree that the reverse position, with the ring-fenced bank funding the non-ring-fenced bank subject to stipulations on timing and circumstances is incompatible with the purpose of the ICB proposals and should be prohibited. However, we see no public policy benefit to preventing the non-ring-fenced bank from funding the ring-fenced bank. To prohibit this activity appears to remove a potential rescue mechanism in the event of a crisis and appears contrary to the goals of the Vickers report. We ask the Government to allow an exemption from the Large Exposures regime for this purpose under specific circumstances.
87. Second, the prohibition on trading as principal. Barclays understanding of Vickers’ intention is that ring-fenced banks should be prohibited from true “proprietary” trading, where banks’ own capital is used to generate trading returns for the institution. However, the definition in the draft Bill may, unless clarified, exempt client intermediation, share dealing on behalf of retail customers and other activities which are not “proprietary” in a real sense. We ask the Government to clarify their intentions.
International issues
Question 30. What will be the impact of the proposals on the international competitiveness of UK banks?
88. It is not possible to accurately measure the impact on international competitiveness with the level of detail provided by this draft Bill. However, we would advise against unilateral or super-equivalent policy implementation.
89. It is also unclear how the interplay between the Liikanen Group recommendations and the banking Reform Bill will affect the international competitiveness of UK banks. Any gaps between the two may result in added obligations for UK institutions, which would be to the detriment of their competitive position.
90. Higher compliance costs will inevitably push activity outside of the jurisdiction, but will not remove the risk of impact on the UK financial system. As the financial crisis demonstrated, banking failure in one jurisdiction will quickly spread to other jurisdictions due to the speed and interconnectedness of modern markets. Losing banking activity to other jurisdictions is therefore both a competitiveness issue, and a stability one.
91. We believe the Government shares these concerns, and we are pleased with the focus on achieving harmonisation which is apparent throughout the draft Bill and accompanying documents.
Question 31. Are the proposals consistent with existing and forthcoming international and EU regulatory initiatives, for example the recent Liikanen Report? To what extent are they likely to be superseded or generate conflicts?
92. In many instances the draft Bill seeks to implement EU wide policy. This is an important acknowledgement of the need for harmonisation, and is to be welcomed. In particular, Barclays supports the decision to implement the EC RRD.
93. However, we do not share the Government’s view that the ICB recommendations are inherently compatible with the Liikanen Group’s proposals. We believe that there are several areas where the Liikanen Group’s recommendations could deviate materially from the ICB’s proposals, even where these differences do not create direct contradictions or incompatibilities. In particular, this relates to the placement of business activities that are not stipulated as mandatorily “in” or “out” by either set of recommendations. This anxiety is compounded by the understandable lack of specificity in the Liikanen Group’s recommendations.
94. Barclays initial analysis suggests that larger clients, interbank lending, loan syndication, wealth management and some hedging services to non-bank customers all currently sit outside of the confirmed scope of the two ring fences.
Other
Question 32. What other matters should the Commission take into account?
95. The Commission’s questions are comprehensive.
31 October 2012
1 HSBC, Barclays, Santander, Lloyds, RBS and The Cooperative Bank.