Banks were pleased this week by news that Europe would impose less-restrictive rules on trading than the US, but the announcement proves that global regulations are likely to remain inconsistent despite pledges to unify them.
At the height of the financial crisis in 2009, world leaders pledged at a G20 summit to coordinate rulemaking. But with a torrent of regulation since then, countries have adopted their own approaches from caps on bankers’ bonuses to capital rules.
Banks say that increases their compliance costs more than necessary, and could even make regulation easier to skirt.
“It does illustrate the problem in terms of coordination,” said Thomas Huertas, a regulatory partner at EY accountants and former senior UK banking supervisor.
The latest example of poor coordination was this week’s leak of EU plans from the bloc’s financial services chief Michel Barnier to stop banks from making bets with their own money, known as proprietary trading.
The principle, known in the US as the Volcker rule after a former federal reserve chairman who advocated it, is designed to protect the financial system from trades like JPMorgan Chase & Co.’s $6 billion ‘London Whale’ loss in 2012.
The US version, finalised last month, defines proprietary trading broadly, forcing banks to spin off such operations. The EU plans define it far more narrowly, giving supervisors and banks potentially more leeway.
Adding to the confusion and the cost of compliance, the three biggest EU economies, Germany, France and Britain, are writing their own separate rules.
“The differing approaches raise the question of whether a single banking model and the associated economies of scale will be possible in the future,” said Alexandria Carr, a financial lawyer at Mayer Brown in London.
The EU plans go less far than many had predicted in requiring funds traded on behalf of a bank’s clients to be kept separate from other operations.
Banking regulators should consider “segregation” – a step less formal than full separation – of customer trading. Countries drawing up their own rules, such as Germany, Britain and France, could be exempt from the EU rules.
That news pleased banks.
“If borne out this would potentially be the beginnings of a good start to the new year,” said Paul Chisnall, executive director at the British Bankers’ Association.
France and Germany in particular will not accept their universal banks like Deutsche Bank and BNP Paribas being split up. Carsten Schneider, a senior politician from Germany’s SDP party in the new coalition government, said that as outlined so far, the EU plans would be a big step backwards.
Global banks complain of the extra cost of complying with differing regulations in each of the countries where they do business. Morgan Stanley says divergence among new rules costs the world’s biggest banks $15 billion a year in total.
Regulators on both sides of the Atlantic complain about rules that have effect outside of their borders. The EU and US are at loggerheads over the foreign reach of American rules to make derivatives safer. Europe has criticised US plans for forcing the US arms of foreign banks to operate as subsidiaries, which would require them to hold a separate buffer of capital in the US as well as back in their home country, adding to costs.
Europe, meanwhile, is implementing the new Basel III global bank capital rules differently. It is introducing the world’s toughest rules on banker bonuses, which will impact both the European operations of US and Asian banks and the American and Asian operations of European banks.
The US has declined to adopt a G20 pledge for a single set of global accounting rules, and US regulators are questioning the need for a common global capital rule for insurers as proposed by the G20.
The G20 summit in Australia this year will finalise rules for “shadow banks” like money market funds. But the EU and US are already taking different approaches.