Banks lobby regulators to relax post-crisis rules

The grounding of the fleets of many airlines is symptomatic of the crisis. © Keystone / Christian Beutler

The global banking industry is demanding regulators relax or delay a raft of post-crisis rules on everything from capital and liquidity to accounting and climate change, which they argue are hampering their ability to respond to the coronavirus crisis. 

Executives have launched the globally co-ordinated push to convince supervisors including the Bank of England, the European Central Bank and US regulators to ensure that new rules and standards do not impede their efforts to keep money flowing to the real economy. 

“With the pandemic continuing to cause significant pressures on markets . . . in short time, policymakers may need to move to new realms of response — including targeted supervisory and regulatory policy measures,” said Axel Weber, chairman of Swiss bank UBS and the Institute of International Finance, a worldwide trade body for the industry. “Anything short of a global, integrated approach will prove unsuccessful.”

This month the Stoxx Europe 600 Banks index and the Dow Jones Bank Index of US lenders have each lost more than 40 per cent, while the cost of insuring bank debt through credit default swaps has soared. As the coronavirus pandemic roiled markets, the Bank of England made an emergency cut to interest rates and the Federal Reserve slashed US interest rates to zero, part of wider packages to shore up support for the global economy.

Interest rates

“Cutting interest rates is almost irrelevant,” said one executive at a global bank, who is among those leading the lobbying effort. “The right thing to do is to get the regulation appropriate to the conditions and to flood the market with liquidity.” 

Chief among their concerns is the introduction of new international capital rules known as Basel IV that force banks to hold extra loss-absorbing buffers, according to several people briefed on the discussions between banks and supervisors. 

+ Read how the Swiss National Bank has responded to the crisis

One executive said banks were pushing for an extension of the implementation of Basel IV — which is due to come into full effect by 2027 — to prevent banks having to build up capital levels by 2021. 

“Banks have started to lobby for substantial changes to Basel IV, that is where they will fight,” said Jérôme Legras, head of research at Axiom Alternative Investments. 

Rules on capital

However, Sascha Steffen, a professor at the Frankfurt School of Finance and Management, warned regulators not to roll back the introduction of capital rules that were “responsible for the fact that banks have entered the coronavirus crisis in a much better position than they did the 2008 crisis”. 

Bill Coen, the former head of the Basel committee of international banking regulators, said that after two decades of engaging with bank advocacy efforts, “my knee-jerk, somewhat cynical reaction is the phrase ‘never let a good crisis go to waste’”.

“However, in this crisis extraordinary measures are required,” he added. “So long as the measures are just temporary, not structural or permanent, it could help reestablish confidence. I don’t think regulators are using the word forbearance; flexibility is the better ‘F’ word.”

Capital requirements are just one area where banks are demanding regulatory relief. The industry has identified an array of other rules on accounting and liquidity they describe as “procyclical” — meaning that they become more onerous in times of economic stress. 

In Europe, banks are calling for supervisors to delay the introduction of tough new accounting rules, known as IFRS9, which force banks to set aside money to cover loans to distressed borrowers before they actually start to default. 

Losses

The industry fears they could be forced to record large upfront losses that would eat into their capital buffers and impede their ability to lend to struggling companies and consumers. 

Lenders in the UK have written to the Bank of England to demand that the transition to the new accounting rules — which are due to come into full effect by 2023 — is extended, said several people who have seen the letter. 

Executives made much the same argument at a meeting in Downing Street last week with the chancellor Rishi Sunak; Mark Carney, the outgoing BoE governor; and Andrew Bailey, the new governor. 

Jes Staley, chief executive of Barclays, which is based in the UK but also has a sizeable Wall Street investment bank, “repeatedly pushed” the IFRS9 issue at the meeting, said several people who attended. 

Banks are confident the BoE will act to ameliorate the impact of the accounting rules. “They are open minded to delaying or at a minimum looking through it but not completely suspending it,” said one person briefed on the discussions. Another executive said they expected the ECB to follow suit. 

“Look through” crises 

Mr Carney also promised to raise the issue with banks’ auditors to remind them that while the accounting standards required lenders to predict future losses, they also allowed some leeway to “look through” crises such as the coronavirus outbreak and make smaller provisions if they believe there is going to be a quick “V-shaped” recovery. 

Several executives said the industry was also asking supervisors to take a “best efforts” approach to money laundering and market abuse, whereby banks would avoid punishment as long as they had tried to do the right thing — even if they had technically breached rules. 

For example, with many traders and compliance staff working from home, banks have asked for leniency on the requirement that they record the phone calls of traders and dealmakers. Some lenders have reported difficulty distributing recording devices to staff who are operating remotely. 

Malpractice

Banks also said that at a time of exploding trading volumes they are struggling to input extra data into the monitoring systems used to create compliance and market abuse alerts, which supervisors use as a starting-point for investigating malpractice. They argue that their IT departments should be focused primarily on ensuring that their trading systems are able to operate smoothly. 

Executives have also asked that the transition from the discredited Libor rate to new interest benchmarks be delayed from its current hard deadline of 2022 to free up employees to work on more pressing matters.

Some signs exist that regulators are reacting favourably to the banks’ demands. For instance, the US Federal Reserve has relaxed some bank liquidity requirements while the Securities and Exchange Commission has waived some requirements on recording traders’ calls. 

In Germany, the main financial watchdog loosened capital requirements on Wednesday, partially reversing its earlier position, while European regulators have delayed stress tests that measure banks’ balance street strength. 

In addition to lobbying their own national regulators, banks are co-ordinating their efforts globally through the IIF, the global trade body. Still, bank executives have bemoaned a lack of international co-operation. 

“The increasingly nationalist politics of the world has meant that there has been little to no co-ordinated action between the individual countries,” said the bank executive, who contrasted the lack of co-operation with the co-ordinated measures taken during the 2008 financial crisis. 

Another person involved in the talks added: “As each country is making decisions, the issue of co-ordination becomes quite urgent.” 

In addition, banks are pushing back against newer regulations that will require them to start disclosing the exposure to climate-related risks from the end of the year. 

In the UK, banks are also pushing for the BoE to delay climate change stress tests. “Steps on the whole green debate have put an additional onus on banks,” said the executive. “We’ve got to be pragmatic.”

Additional reporting by Tabby Kinder in London, Olaf Storbeck in Frankfurt, and Kiran Stacey in Washington

Copyright The Financial Times Limited 2019