23 April 2013

Barnier warns US over 'radical' new bank rule

"First of all, I want to stress that the Commission fully shares one of the general objectives of the NPR, which is to limit the risks that operations of large FBOs may pose to the US financial system, including through the implementation of effective cross-border resolution mechanisms. However, in line with position taken by G20 leaders at the Washington Summit of 2008, he believes that, even though regulation remains first and foremost the responsibility of national regulators, the global nature of financial markets and the lessons drawn from the recent crisis clearly call for a globally-coordinated response. Indeed, as a central part of our response to the vulnerabilities unveiled by the crisis, the EU and the US have been at the forefront of promoting and implementing an internationally-harmonised approach to banking regulation.

On 20 March 2013, the European Parliament and the Council of the EU reached an agreement on the legislative package implementing the Basel III rules in the EU from the 1 January 2014. I am sure that Mr. Bernanke shares my conviction about the importance of this achievement, which paves the way to a strengthened, more resilient and better-regulated banking sector. Together with the other pillars of the future Banking Union, including the Single Supervisory Mechanism, it will help enhance financial stability in the EU and in all other countries where EU banks are active, including the US. I now expect the US to come forward with final rules on the implementation of the Basel III agreement, thereby honouring the G20 commitment.

If there is need to maximise the effectiveness of the new international standards, it is more essential than ever to direct our common efforts towards ensuring their timely and consistent implementation in each jurisdiction, avoiding potential adverse cross-border effects. The EU is fully committed to this goal. As a consequence, in order to avoid unnecessary administrative burdens and duplicative regulatory costs on foreign institutions active in the EU, the EU framework exempts foreign banking subsidiaries from certain requirements, particularly in the area of consolidated supervision, provided, in the home jurisdiction, they are subject to a regulatory and supervisory framework equivalent to that of the EU. I hope that the same approach is implemented also by all other jurisdictions, particularly those actively involved in the harmonization of banking rules at global level.

Against this background, certain elements of the FBOs’ NPRs seem to be in substantial contradiction to the global regulatory convergence and could have a negative impact on the implementation of Basel II, jeopardising and/or delaying the process. This may also prove detrimental for the integration of international capital markets, and for the global economic recovery.

In my opinion, the NPR would seem to represent a radical departure from the existing US policy on consolidated supervision of FBOs, in a way that may frustrate the efforts to ensure a consistent implementation of the Basel II standards against jurisdictions. Indeed, the proposed rules implement a ‘one-size-fits-all’ approach to consolidated supervision of FBOs, preventing US Supervisors from being able, under certain conditions, to rely on the capital provided by their parent and on supervision or regulation on a consolidated basis to which the latter is subject to its home jurisdiction.

The Intermediate Holding Company (IHC) requirement, which is one of the most important innovations of the NPR, depends exclusively on the amount of global and US assets of the institution, completely disregarding whether the latter is subject or not to a consolidated supervision in its home country equivalent to that of the US.

In my view, the IHC requirement, together with the application of heightened prudential standards at sub-consolidated level, entails relevant economic consequences for FBOs in terms of increased costs. In particular:

• Costs for establishing and maintaining the IHC and for ensuring compliance with governance and risk management standards;
• Costs for ensuring compliance with the enhanced prudential requirements at IHC level and in relation to the additional reporting burden;
• Costs for the reduced flexibility in carrying out capital and liquidity management strategies at group-wide level.

Such costs would only be justified only if the FBOs were not subject, on a consolidated basis, to home country standards comparable to those of the US and if the US financial stability were at stake. In reality, despite the declared intention of putting FBOs on an equal competitive footing with US BHCs, the new framework may, instead, result in a competitive disadvantage for FBOs when considering their operations on a global basis.

I fear that the NPR could spark a protectionist reaction from other jurisdictions, which could ultimately have a substantial negative impact on the global economic recovery. Indeed, the potential retaliation effects of the new rules could end-up with a fragmentation of global banking markets and regulatory frameworks, with foreseeable consequences in terms of higher concentration of markets and lower levels of competition. These developments would translate into higher costs for banks, particularly those which are internationally active, with negative repercussions on their ability to finance the real economy and economic growth."

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