Now
they want to kiss all the bankers
London
leads way for a new political compact between regulators and
financial industry.
By FRANCESCO
GUERRERA 2/8/16, 5:30 AM CET
LONDON — A warm
front is sweeping through the once-chilly relationship between banks
and regulators.
After years of
friction and recriminations following the financial crisis, when
bankers were the favored bogeymen for policymakers on both sides of
the Atlantic, executives and regulators are noting a shift in the
political and regulatory climate.
“There is a
noticeable change in behavior” in the past few months, said a
senior executive at a large multinational bank. “On the regulators’
side there’s a real sense that they see banks as part of the
solution and not as just being associated with the problem. And on
our side, there is a willingness to get it right.”
This rapprochement
is creating some apprehension. POLITICO spoke to nearly a dozen
bankers and regulators who described a change in attitudes but
declined to go on the record for fear of angering public opinion and
politicians. “There mustn’t be any suggestions that regulators
are going ‘soft’ on banks,” said one executive.
The question is
whether this more relaxed mood heralds a new era in the relationship
between watchdogs and financial groups — one that critics of the
industry dread — or is just a temporary respite after an intense
period of rule-making.
Many bankers are
optimistic. “The rule of thumb with regulators now is that they do
things to make the industry better and not things that are irrelevant
to the industry but get them headlines in newspaper,” said a senior
London-based banker.
Regulators privately
agree, saying that they need strong banks to help jolt economic
growth and restore the public’s faith in a sector that has been
battered by bad news and even worse press for years.
“There’s a bit
more flexibility on the part of regulators,” said Sam Tymms, a
former U.K. regulator and now a managing director at Promontory
Financial Group, a consultancy that advises banks and watchdogs.
“What we are seeing is regulators saying: ‘If you get on and sort
it out we won’t move as aggressively as we might otherwise have
done’.”
‘Shoot first, ask
questions later’
The current truce is
a far cry from the cold war in the wake of the financial crisis. In
the fraught months and years that followed the turmoil of 2008 , the
two sides were barely on speaking terms.
Regulators and
policymakers in both the U.S. and Europe responded to those
cataclysmic events with a flurry of new rules and an onslaught of
tough penalties against financial groups. Bankers felt victimized and
ignored, incapable of getting their voices heard in the corridors of
power in Brussels, London and Washington, and forced to pay huge
fines for problems not entirely of their own making.
From higher capital
buffers to restrictions on riskier trading activities and curbs on
bonuses, financial groups had to contend with a comprehensive
tightening of the rules of their game. To add to their woes, a new
breed of aggressive enforcers came to the fore. For many bankers, the
era was epitomized by Martin Wheatley, the post-crisis head of the
U.K.’s Financial Conduct Authority, who famously summarized his
credo as: “shoot first, ask questions later.”
George Osborne
ushered in detente with the City of London in a speech at Mansion
House last June.
In total, 20 of the
world’s largest banks paid some $235 billion in fines in the seven
years after the crisis, according to calculations by Reuters. The
regulatory crackdown, roughly equivalent to the annual gross domestic
product of Portugal, caused consternation among executives, hurt bank
employees’ morale and prompted many to leave finance for good.
The state of play
was summarized with characteristic frankness by Jamie Dimon in
January 2015. Less than two years after J.P. Morgan had agreed to pay
the U.S. government $13 billion in an historic settlement over
mortgage-related issues, its chief executive declared that banks were
“under assault.” “We have five or six regulators or people
coming after us on every different issue,” Dimon told reporters.
“It’s a hard thing to deal with.”
So what has changed?
Bank executives and regulators point to three major factors for the
more benign environment: fading memories of the crisis as time
marches on; the natural end of a frenetic cycle of rule-writing and
enforcement; and the realization that financial firms are a crucial
part of the economic machine.
London is leading
the way in this new compact with the financial industry. For many
insiders, the turning point was June 10, 2015. On that day, in the
austere surroundings of the Mansion House in the City of London,
Chancellor of the Exchequer George Osborne announced a “new
settlement” for the financial industry.
“Simply ratcheting
up ever-larger fines that just penalize shareholders, erode capital
reserves and diminish the lending potential of the economy is not, in
the end, a long term answer,” he told an audience of banking and
political grandees.
With those words,
the British Conservative government was sending a clear message to
one of the country’s key industries: No more fighting, we need you.
Within a month, Wheatley, the activist regulator, was gone, leaving
in his wake a trail of relieved bankers. In the words of one of them:
“One of the regulators’ missions is to preserve trust in the
financial system. If all they do is bash banks, it actually
undermines the confidence in the system.”
At the end of last
year, bankers got an unexpected Christmas present from U.K.
regulators: The FCA ditched a long-awaited review of banking culture,
which was likely to be critical of the industry. Then, last month,
Andrew Bailey, a veteran Bank of England official who is widely
respected in the City, took up the post of FCA head.
David Cameron’s
Conservative government is now seeking the City’s help in the
campaign to keep Britain in the European Union. Cameron and Osborne
know that finance’s global nature makes it an important ally in the
upcoming referendum against “Brexit”.
Brussels and Basel
rules
Outside London the
picture is less clear-cut. In Brussels, the European Commission is in
listening mode. The Directorate-General for Financial Stability,
Financial Services and Capital Markets Union (DG FISMA) has just
completed a “call for evidence,” asking financial companies what
the cumulative impact of years of new rules will be on their
business.
The industry’s
frustration with the post-crisis onslaught of rules is apparent in
their overwhelming response to the Commission’s request – more
than 300 submissions amounting to thousands of pages. It will take
months to compile and analyze the oceans of ink spilled by banks and
their advisors. But for the optimists within the industry, this is a
sign that Brussels is willing to take a long hard look at its rules
and change what is confusing, counterproductive or harmful.
For others, this is
merely a window-dressing exercise, one that will lead to even more
paper-pushing but little action. The skeptics point to the next wave
of regulations coming from the European Commission and other
international bodies such as the Basel Committee on Banking
Supervision. Indeed, a research paper by a consultancy doing the
rounds in the Brussels community in recent weeks warns about “the
return of banking” to the European Union legislative agenda in
2016.
“I really don’t
see a wind of change sweeping through the financial regulatory
landscape,” lamented a senior banker last week. In his view, the
industry is still weighed down by scores of financial regulations and
overseen by tough figures such as Daniel Tarullo, a member of the
Federal Reserve’s board of governors, in the U.S. or Andrew Tyrie,
the influential head of a committee of U.K. members of parliament.
Even if, to
paraphrase Wheatley, regulators ask questions first these days, they
are still expected to shoot afterwards, partly because public opinion
and politicians demand it. “The public’s desire for retribution
has not been sated,” said Jane Fuller, co-director of the Centre
for the Study of Financial Innovation, a think-tank.
Asked about the
public’s low opinion of his industry, the executive of a
multinational bank agreed and sighed: “It will take time,” he
said. “It will take a long time.”
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