Regulators will need closer co-operation on resolution regimes to avoid further fragmentation of the global banking sector.
Speaking at a British Bankers’ Association conference in October 2013, Andrew Bailey, head of the UK Prudential Regulatory Authority, warned of cross-border banking becoming “balkanised” due to “a preference for banks to subsidiarise in countries beyond their home state, and for regulators to wish for – and achieve – the location of more capital and larger pools of liquid assets in their [own] jurisdictions.”
Fragmentation has been a cause of complaint for the bankers who run those cross-border groups for some time. But Mr Bailey’s speech is a sign that regulators are starting to listen. The answer to this problem, according to Mr Bailey, is mutual recognition between national regulators, to offset the urge to ringfence subsidiaries in each jurisdiction.
The area where this matters most is in planning for the resolution of cross-border banking groups. If local regulators seek to control the resolution process of a cross-border bank’s operations in their own jurisdiction – a process labelled multiple point of entry resolution – this will lead further down the path to fragmentation. If jurisdictions can agree to allow the home supervisor to run the whole process worldwide – single-point-of-entry resolution – then the fragmentation trend could be reversed.
The US authorities seem to be preparing for a bold step in the direction of a single-point-of-entry approach. Bankers still harbour some concerns, especially over the mechanisms for bailing in debt at the holding company level to recapitalise overseas subsidiaries. But the orderly liquidation proposals that are being drafted, combined with a joint approach to resolution published by the US Federal Deposit Insurance Corporation and the Bank of England in December 2012, should provide the beginnings of a framework for the largest US banks to continue their global strategies in a coherent way.
On the other side of the Atlantic, a single eurozone banking supervisor is clearly helpful to provide an integrated approach to pan-European banking groups. But the single resolution mechanism (SRM) element of banking union is proving harder to agree. To promote a single European market, and indeed a global market for banking services, the SRM will need to sign deals with non-eurozone supervisors to enable single-point-of-entry resolution for all banks active in the eurozone, not just those headquartered there.
