How do banking regulatory bodies vary?

Jan Putnis prefaced the Eighth Edition of the Banking Regulation Review this year by saying that current political trends herald ‘an era in which banking regulation will be more varied, and potentially much less well coordinated, between major economies than the principal authors of the major post-crisis reforms in the United States and Europe had hoped’ – and to which the G20 had officially committed. Competitive regulation, then: but how do regulators differ in their approach to financial compliance, market and banking regulation?


Regulators differ in organisation and structure

When analysing a regulatory regime, the starting point is how system and prudential supervision on the one hand, and conduct-of-business supervision on the other are both organised.

For EU members, the European Central Bank runs the system, national Banks and regulators implement prudential regulation, whilst individual regulatory bodies such as the Financial Conduct Authority in the UK and the Netherlands Authority for the Financial Markets create rules, run checks, and where necessary impose fines and other penalties. In the USA, banks are regulated at federal level by the Federal Deposit Insurance Corporation, the Federal Reserve Board, the National Credit Union Administration and even the Office of the Comptroller of the Currency, with duplicate structures at State level.

On top of these diverse structures, however, sit the international banking regulatory structure of the Basel Agreement. Here lies real hope for international harmonisation. From 2014, global standards for bank capital, liquidity and leverage have been introduced in the EU, whilst the US has now also adopted Basel, at least in part.

More fine-grained regulation is now regular, so for example in early 2017, the Basel Committee on Banking Supervision (BCBS) was working on enhanced disclosure rules under Pillar 3 as well as revising the Standardised approach to both credit and operational risk and refining the calibration of capital floors. Similar agreements exist for specific financial industries, notably insurance, fund management and trading.

The difference in banking regulations

Second, actual regulations differ. How stress tests are conducted and by which organisations, margin requirements for non-cleared derivatives, supervisory controls for ICT in relation to cybercrime, deposit protection and fraud prevention, and even bank branch regulations differ.

For example, non-EEA banks used to be allowed to have UK branches, without requirements for branch capital or often liquidity requirements, although the FSA has now stepped back from this light touch. By contrast the US has always restricted the deposit-taking activities of US branches of foreign banks to wholesale deposit-taking, has required foreign branches to hold a capital equivalency deposit of 1% of liabilities (or $2m if greater), and has retained powers to impose specific asset maintenance requirements on the branch.

US branches of foreign banks are subject to the special insolvency and receivership applicable to US banks and assets recovered are used to satisfy the local creditors of the branch first. Another example: unlike the US, the EU does not exempt Foreign Exchange derivatives. All EU regulated financial firms must report, clear and trade – unlike in the USA, where small banks are exempt.

The EU also claims that its capital standards for clearing counterparties in Europe remain a lot tougher than in the US, and that client protection standards are more stringent, with individual segregation giving potentially greater protection than omnibus gross segregation, citing the falls of MF Global as proof of the difference.

As if this were not sufficient, there are in addition the national regulations that flow from specific political and other policy decisions, notably those related to money-laundering and sanctions in particular. Critics have suggested regulation not always even-handed. In January 2017, the US Treasury Department, Office of Foreign Assets Control (OFAC) settled for over $500,000 with a large Canadian bank for approximately 170 alleged violations of U.S. sanctions against Iran and Cuba, whereas although two of the bank’s European subsidiaries had committed over twenty times as many US sanctions violations, no penalties flowed.

The need to develop understanding of these wide-ranging regulatory differences results in clear requirements for banking regulation training, sometimes the result of specific institutional failings, as the consequences for an institution of failing to adhere to the required standards of training for staff are frequently severe. In addition, almost all jurisdictions impose different requirements for qualifications for participation in markets and in banking, which are largely also met by banking training courses.