The regulatory reform programme must start paying more attention to its impact on economic growth

Swiss Financial Round Table discussed key topics common to both countries’ financial services industries. UK and Swiss bankers today (27 April) urged regulators to take into account the impact that regulatory reforms are likely to have on the global economic recovery and the international competitiveness of banks in the UK and Switzerland. The topics and conclusions drawn were:

Basel III and the national finishes:

Regulators in the UK and in Switzerland have decided to exceed the measures concluded under Basel III, the Vickers ring fence and the “Swiss Finish”. The participants in the discussion made it clear that banks are not opposed to reform. They support measures to strengthen the resilience of the financial system, but call for their adequate application.
Reforms that unduly affect credit supply are not without consequences, for banks, existing and potential investors, the underlying economy and, arguably, society. The discussion concluded that reforms should take account of the impact on the real economy and be calibrated, timed and sequenced so as not to extinguish the fragile economic recovery.

Macro-prudential supervision and financial stability:

The primary objective of macro-prudential supervision is to increase the stability of the financial system. Macro-prudential supervision should in this respect minimise the probability and the consequences of a systemic crisis that leads to disruptions that may prove sufficiently severe to inflict significant damage on the broader economy. Additional capital should not be the automatic answer to gaps in regulation and supervision. Macro-prudential supervision, greater shareholder and board engagement, and greater in-house risk control are just as important. It is crucial that regulatory bodies use the right mix of tools and react in a measured way.
In addition, as the controls on credit and activities will have an impact on society, it is essential that the authorities make sure that the new regulatory architecture is fit for purpose and bring the public into the conversation.
Angela Knight, Chief Executive of the British Bankers’ Association, said: “The industry is supportive and engaged with the regulatory reform programme and the focus on strengthening of capital and liquidity requirements. A robust regulatory framework that gives financial stability and market confidence is important for economies and for our customers and plays an essential part in the long process of restoring trust. But growth does not automatically follow from stability and some of the new rules can easily have the effect of restraining economic recovery. For example there has been considerable focus on the need for some banks to raise much more capital, but as the European Banking Authority and others have pointed out, the liquidity requirements are even larger. The combination has the potential both to increase the cost of borrowing for businesses and individuals and as banks’ business models adapt to the new regulatory environment, constrain the supply of credit, especially on the upturn.
”We also support the creation of the new financial stability oversight bodies and the adoption of a macro-prudential approach to supervision. Here the vital piece is that the powers of this ‘new kid on the block’ are considered as a part of a wider toolkit which focuses upon the risks to financial stability and the economy wherever they emerge. This is a new world and the potential for unintended consequences is high with one obvious risk being that the financial stability oversight bodies start shadowing the micro-prudential supervisors as well. Our advice is to proceed with caution, review frequently in the light of experience and don’t be afraid to change when the result is not as anticipated.”
Patrick Odier, Chairman of the Swiss Bankers Association, said: “Capital and liquidity rules play an important role in increasing the resilience of the financial markets. We therefore acknowledge the need to improve capital requirements as well as liquidity standards. But we call for the right regulation, not overregulation. In order to maintain competitiveness, appropriate capitalization and liquidity requirements must be coordinated internationally for globally acting institutions in particular. On the national level, local specifications should be taken into consideration commensurate with international requirements.
The SBA recognises the need to monitor systemic stability and supports efforts to improve the stability of the financial system. In the development of macro-prudential tools, however, it must be clear when they apply, who uses them and what effect they have. Banking associations, as the representatives of the banks, expect to be consulted by the national supervisory bodies in the formulation of macro-prudential regulation.”
The Round Table was hosted by the Lord Mayor of the City of London, Alderman David Wootton, at Mansion House in London and was attended by more than 40 senior representatives from both the British and Swiss financial services industries including Andrew Bailey, Director, UK Banks and Building Societies at the Financial Services Authority and Deputy Chief Executive Designate at the Prudential Regulatory Authority; Victoria Saporta, Head of Prudential Policy at the Bank of England; Bertrand Rime, Director of the Financial Stability Section at the Swiss National Bank; and Martin Hess, Head of Economic Policy at the Swiss Bankers Association. The debate was chaired by Sir Nigel Wicks, chairman of Euroclear plc.
Note to editors: The City of London-Swiss Financial Round Tables are organised jointly by the British Bankers’ Association and the Swiss Bankers’ Association. The first Round Table was held in London in June 2006. Since then, senior representatives of the British and Swiss financial services industries meet yearly, alternating between London and Switzerland.