EU watchdog warns of financial instability as Sibos bankers complain about regulatory burden

Financial stability within the EU is at risk unless decisive and swift action is implemented by all authorities, according to a warning issued by the European Systemic Risk Board (ESRB), the EU's super-watchdog.

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EU watchdog warns of financial instability as Sibos bankers complain about regulatory burden

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Sovereign stress, funding vulnerabilities and weakening growth have all contributed to the instability and, given the interconnectedness of Europe's financial system, there is a "rapidly rising risk of significant contagion" says the ESRB.

The macro-prudential body, which was set up in 2009 specifically to monitor the threat of systemic risk within the EU, has called on all authorities to urgently implement the measures agreed in the board's July meeting of heads of state and government of the Euro area; to adopt sustainable fiscal policies and growth-enhancing structural measures; and to enhance the co-ordination and consistency of communication. "Authorities must act in unison with a total commitment to safeguard financial stability," read the statement.

The ESRB's calls were echoed by a group of senior bankers speaking at Sibos, the annual user conference of financial messaging network Swift. The burden of onerous and inconsistent regulation was a recurring theme during a panel session dedicated to discussing the potential for growth in the global economy.

"There are significant regional differences between regulation in Switzerland and regulation in the EU and in the US, such as Dodd Frank," said Tim Keaney, chief executive of Asset Servicing, BNY Mellon. "Because of the unevenness and sheer extent of the regulation, I am not convinced that it will succeed in building confidence in the system."

Not only is the regulatory burden excessive for both banks and their customers but certain regulatory requirements do not adequately reflect the associated risk and threaten to limit potential growth. The Basel III rules for trade finance came in for particularly criticism with the panelists deeming the capital requirements far too excessive for an industry where the risk profile is relatively low.

"I think these rules need to be significantly rewritten," said Paul Simpson, head of global transaction services, Bank of America Merrill Lynch. "Trade finance is an asset class that has stood for over 200 years and it is not where the problems in the market came from. Trade finance is also a key tool for bringing countries out of tough economic conditions so regulators have to consider that."

"An unintended consequence of regulation is that if the requirements are too onerous, people will find a way around it," said John Coverdale, group general manager, head of global transaction banking, HSBC. For example, certain instruments could be forced away from regulated structures into dark pools because they are unable to cope with the compliance burden.

Securities lending was also highlighted as an area restricted by regulation. "The regulators need to understand the risk in these services and match the capital requirements with the risk profile," said BNY Mellon's Keaney.

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Comments: (1)

A Finextra member 

Comment on the SIBOS experience from a market participant who will remain nameless: "Don't you feel like you are in The Matrix here in Toronto? It's where it was filmed. No sign of Morphius or Neo but there are a fair few peeps at the conference who look like Agent Smith". Lol at that one

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