Banking union should not delay CRD4

Thu Nov 22, 2012 7:11am EST

LONDON, Nov 22 (IFR) - European banking union talks should not necessarily delay the implementation of CRD4, a top UK government policy maker said at IFR's 2012 bank capital conference, adding that there was a strong political incentive to get the new regulations finalised.

"There is a drive to get the CRD4 agreed. The CRD4 and banking union are linked, but this does not change the need to get CRD4 up and running. Both are moving along," said Ian Searle, policy advisor of capital issues at HM Treasury on Thursday.

Although negotiations on CRD4 had been slow to start, they had picked up, Searle added.

"There is a strong political incentive to get it done, especially against the backdrop of the banking union," he said, although there are still some sticking points, which include the European parliament's recommendations on remuneration.

Experts speaking on the panel agreed that issuers were starting to get more comfortable with the new framework, but stressed the need for more clarity.

"We're very close to getting all the issues resolved, particularly around the ability to structure new capital. Although there are some areas that need to be finalised, and are a bit rough around edges, our clients are starting to get comfortable," said AJ Davidson, head of hybrid capital at RBS.

He said Tier 2 instruments were the most stable in terms of there being less uncertainty around structuring and features the instruments should have.

"We are starting to get to grip with a new reality," Davidson added.

The main problem surrounding Tier 1 securities concerns the diverse framework in terms of corporate law across Europe, which could make it difficult to establish a level playing field among banks in different countries.

Aside from regulation and a banking union, other important parameters include tax rules and supervision.

"Having one supervisor is important," said Khalid Krim, head of capital structuring EMEA at Morgan Stanley.

The panel also played down differences in the speed at which different countries were moving on Basel 3, commenting on a perception in the market that the U.S. could be slipping towards 2014 implementation.

"The U.S. delays do not mean they are moving away from it. The U.S. text is very good. It's short and clear, and offers less room for interpretation than other texts globally," said Gerald Podobnik, head of capital solutions at Deutsche Bank.

"What we are seeing, though, is that emerging markets nations are really well advanced, while the two big players that used to drive this are late."

Davidson agreed that the Dodd Frank framework was clear, and that banks could issue preference shares for Tier 1 even if Basel 3 is not implemented in 2013.

Although the resolution directive still needs to be implemented in Europe, bankers stressed the need to get the resolution right.

The topic of grandfathering also stoked debate, particularly surrounding a lack of clarity on the issue, which panelists said was one of the major reasons for the lack of issuance in the first half of the year.

"Banks are including stop-gap measures in Tier 2 because they are not getting clarity from regulators," said Davidson.

"The biggest issue around this is not when the cut-off date is, as we expect that to be year-end, and is the reason why people are structuring deals on that basis. The broader debate is what happens on Jan 1. Will a bank have to include opt-in arrangements, or will they include contractual obligations?"

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