FOR those oddballs whose hearts sing at the thought of bank regulation, Europe is a pretty good place to be. No fewer than five lots of rules are about to come into force, are near completion or are due for overhaul. They will open up European banking to more competition, tighten rules on trading, dent reported profits and boost capital requirements. Although they should also make Europe’s financial system healthier, bankers—after a decade of ever-tightening regulation since the crisis of 2007-08—may be less enthused.
Start with the extra competition. On January 13th the European Union’s updated Payment Services Directive, PSD2, takes effect. It sets terms of engagement between banks, which have had a monopoly on customers’ account data and a tight grip on payments, and others—financial-technology companies and rival banks—that are already muscling in. Payment providers allow people to pay merchants by direct transfer from their bank accounts. Account aggregators pull together data from accounts at several banks, so that Europeans can see a broad view of their finances in one place—and maybe find better deals for insurance, mortgages and so forth.
The new entrants need not only their customers’ permission to take money and data from their accounts but also co-operation from their banks. They worry that banks won’t play fair. Banks, for their part, have fretted that opening up their systems may expose customers to fraud and themselves to lawsuits. On November 27th the European Commission adopted technical standards intended to balance competition and security. Although the directive applies from next month, the standards may not take effect until September 2019. Banks and their rivals will meanwhile have to rub along.
The standards demand that customers supply two out of three types of proof of identity before transactions are approved: something they know (a password or code); something they own (a card or a phone); and something they are (eg, a fingerprint). This approach is already common, though not universal, online.
To communicate with payment-services providers and account aggregators, banks have two options. They may allow them access through their online customer interfaces. Or they can build dedicated interfaces into which the newcomers can plug their applications. Almost all banks are expected to choose the latter. To guarantee fair play, they must have a fallback, in case the dedicated interface fails.
While retail banks grapple with PSD2, investment banks and asset managers have been bracing themselves for MiFID2, the refreshed Markets in Financial Instruments Directive, which takes effect on January 3rd. Intended to make financial markets more transparent—and thus, in theory, safer and more competitive—MiFID2 will restrict trading in securities on banks’ internal venues and force more derivatives hitherto traded “over the counter” onto centralised exchanges. It also obliges banks to charge clients separately for research, rather than bundle it in with other services. Some are swallowing the cost; some are cutting analysts.
One way or another, the other three changes are all about safety. From January banks in Europe (and many other places, but not America) must apply a new accounting standard, IFRS 9, obliging them to make provisions for expected loan losses, rather than wait until losses are incurred. That is likely to knock earnings next year. Most banks surveyed by the European Banking Authority, a supervisor, said they expected profits to become more volatile. The same could happen to lending.
Next, it seems that the last big bit of Basel 3, a set of global capital standards revised after the financial crisis, may finally be complete. Officials had hoped for agreement a year ago, but haggling continued. The central-bank governors and supervisors who approve the standards are due to hold a press conference in Frankfurt on December 7th. Surely, they would not bother if they had nothing to say?
At issue have been the internal models big banks use to calculate risk-weighted assets (RWAs). The lower the answer, the higher the ratio of equity to RWAs, a key gauge of capital strength, and the less equity banks need. To limit the discount from these models, Basel standard-setters proposed a floor for the ratio of banks’ RWA estimates to those yielded by a standard approach, at first between 60% and 90%. American negotiators, though their banks are little affected, favoured a high floor and Europeans a low one or none; the French were the most vocal. In October Bloomberg reported that negotiators were settling on a ratio of 72.5%.
Assuming the floor is agreed on, it will, like other Basel rules, be phased in over several years. The fifth and last change to Europe’s regulatory framework could take every bit as long. On December 6th the European Commission is due to propose a fortification of economic and monetary union. As part of that effort, in October it exhorted governments to complete the EU’s half-finished banking union.
Although the euro area now has—belatedly—a single supervisor, housed in the European Central Bank (ECB), and a single body to deal with insolvent banks, it still lacks a single deposit-insurance scheme, chiefly because German taxpayers do not want to be on the hook for the failings of lenders farther south. The commission hopes that the Germans can be won over, by introducing the scheme gradually and by tackling the bad loans that still burden banks in Italy and elsewhere. Both it and the ECB also want to be firmer on bad loans in future: the ECB has suggested that banks make full provision for unsecured duds after two years and secured ones after seven. The commission is also exploring the creation of new securities, backed by pools of sovereign debt from all euro-area countries, to weaken the link between European banks and national governments.
With all this to worry about—oh, and Brexit—Europe’s bankers may look enviously westward. American banks and supervisors were faster to get their houses in order after the crisis, and under President Donald Trump the regulatory tide is turning. This week Jerome Powell, Mr Trump’s choice to lead the Federal Reserve, told senators that regulation was “tough enough”. By now, Europe’s bankers know better than to expect much sympathy.