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Britain banking regulation to tighten as a consequence of leaving the neoliberal EU

It is Wednesday and so just a short blog day. I note that the British Remainer Left fall over themselves to signal whenever there is any bad news about Britain that it must be because of Brexit – “see, we told you so sort of stuff”. And with the pandemic and government incompetence there have been lots of opportunities for this lot to do that. I guess it makes them feel better as the Labour Party designs its comeback based on the ‘flag’ and ‘patriotism’ and expunging any relics of Jeremy Corbyn. Good luck with that, it is bound to work! But the future of Britain will actually be determined by a range of factors now in the control of the authorities and how they handle the transition away from EU law will be a significant element in that ensuring that future works for the people rather than just isolates Britain as a neoliberal hell-hole. We received our first sign of how things might work out last week when the Bank of England’s Prudential Regulation Authority released their latest Consultation Paper (CP5/21, (February 12, 2021) – Implementation of Basel standards – which marked a sharp shift away from the lax EU banking standards. The Remainers were silent on this.

This was the Bank of England Prudential Regulation Authority’s first major post-Brexit statement and upon reading it you will learn that it seeks to impose much tougher capital adequacy rules on British banks than operated within the European Union.

The PRA seeks to set out the new rules that implement “international standards through a new PRA Capital Requirements Regulations (CRR) rule instrument.”

They recognise that there is now a lacunae given Brexit and see the “purpose of these rules is to implement some of the set of international standards that remain to be implemented in the UK.”

The discussion is in the context of the Basel Committee on Banking Supervision (BCBS) standards which became universally relevant during the GFC.

These standards are often referred to as the capital adequacy rules.

Nations:

… agreed a series of reforms to the financial services regulatory framework intended to enhance the resilience of internationally active banks … These measures are known as ‘Basel III’ standards. Some of the standards were implemented into EU law … and subsequently converted into UK law … However, some Basel III standards were not implemented in the EU before the end of the transition period and so remain to be implemented in the UK.

I have written about the Basel III approach to banking regulation before:

1. Banks might be forced to buy government bonds … (September 24, 2009).

2. Lending is capital- not reserve-constrained (April 5, 2010).

3. New central bank initiative shows governments are not financially constrained (January 24, 2012).

The Bank’s Consultation Paper documents the changes that the “HM Government’s Financial Services Bill (the FS Bill) proposes to enable the implementation of those standards”.

There are 14 areas where the new legislation will improve existing standards.

One concerns the definition of capital:

… revision to the definition of capital, in particular for the treatment of Common Equity Tier 1 (CET1) deductions for software assets and certain collective investment undertakings (CIUs).

What is that about?

It means that banks making loans will not be able to claim software assets as capital to extend their capacity to make loans.

In 2020, there was a decision made by the European Union with respect to the very precarious state of Deutsche Bank AG to allow them to include software assets for prudential purposes.

DB was forced by the European Banking Authority to justify the treatment of software assets.

On July 7, 2020, DB – responded – to a series of questions put to the company by the authority.

The British PRA has determined that such a treatment violates the intent of the Basel standards.

They say:

1. “The Basel III standards require that intangible assets be deducted fully from CET1, including software assets that qualify as intangible assets under the relevant accounting standards. This approach reflects the concern that intangible assets are not sufficiently loss absorbent on a going concern basis to warrant recognition as CET1 capital.”

2. “The EU CRR II introduced requirements to exclude certain software assets from the requirement for CET1 deduction … Under the requirements, some software assets that are accounted as intangible assets would not require deduction from CET1, or be subject to a requirement for only partial deduction”.

3. “The PRA published a statement on its concern that excluding such software assets from the requirement for CET1 deduction could undermine the safety and soundness of firms.”

4. “It recommended that firms do not base their distribution or lending decisions on any capital increase from applying the revised EU CRR II deduction requirement.”

5. “The PRA found no credible evidence that software assets would absorb losses effectively in a stress. Accordingly, the PRA proposes to modify Article 36 of the CRR (as it forms part of retained EU law) when it is transferred into PRA rules to require the full deduction from CET1 of all intangible assets, with no exception for software assets.”

So to cut a long and detailed story short, the new regulative environment proposed by the PRA will tighten bank capital and provide for a much safer financial sector than would have been the case had Britain remained within the EU and been bound by the EU financial directives.

The PRA clearly assessed that the EU regulatory ‘soft touch’ might lead to unsafe British banks and reduce their capacity to have resources on tap that can absorb losses arising from bad loans or speculative errors.

So, while the Remainers are constantly speculating about the collapse of labour standards under Brexit and chlorinated chickens and all the rest of it, the first concrete step to redefine the regulative environment in the newly sovereign Britain will reverse the neoliberal approach that favours banksters.

But then the Remainers are silent on that because it doesn’t fit their story.

Conclusion

The EU is setting its standards to suit DB. The British standards, now that it is free to set them, are more robust by far and identify one of the major problems that have arisen in the neoliberal era.

Please don’t conclude I think the proposed new British regulative environment is perfect and cannot be improved.

Far from it.

But it is a vast improvement on what the EU is prepared to push onto its banking system and that will be of benefit to the British people.

That could have only been achieved as a consequence of Brexit.

Music – RIP Chick Corea

I guess I had to offer something from – Chick Corea – given he died last week (February 8, 2021) and played on so many albums that I like and listen to.

He was a key member of the jazz set who abandoned purism in the late 1960s because the venues were drying up and their incomes falling and embraced – Jazz Fusion – which combined the harmony and improvisation of jazz with the beats from soul, R&B and rock’n’roll.

There was also a shift the other way from rock to jazz rock and many a great player got lost in the complexity of multiple key and time signature changes and elaborate harmony structures overlaid with excessively long soloing. Luckily, that era closed out relatively quickly.

At any rate, all us serious musicians (-: went out in 1970 or so and purchased – Bitches Brew – which was a studio double album from Miles Davis with the who’s who of the new fusion renegades.

I had a friend at the time who played Dixieland trombone and he hated this development. But I liked it.

That album had a lot of great players on it and this song is one of the favourites – Spanish Key:

  • Miles Davis – trumpet.
  • Wayne Shorter – soprano sax.
  • Chick Corea – electric piano – Right pan in mix.
  • Jack DeJohnette – drum set – Right pan in mix.
  • Dave Holland – bass.
  • Bennie Maupin – bass clarinet.
  • Joe Zawinul – electric piano – Left pan in mix.
  • Larry Young – electric piano – Centre pan in mix.
  • John McLaughlin – electric guitar.
  • Harvey Brooks – electric bass.
  • Lenny White – drum set – Left pan in mix.
  • Don Alias – congas.
  • Juma Santos – shaker.
  • Of these, Wayne Shorter, Dave Holland, Chick Corea and Jack DeJohnette were members of Miles Davis’s touring band and for this session he called up a host of other players as listed.

    Phenomenal playing.

    RIP Chick Corea.

    That is enough for today!

    (c) Copyright 2021 William Mitchell. All Rights Reserved.

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      This Post Has 13 Comments
      1. “So, while the Remainers are constantly speculating about the collapse of labour standards under Brexit and ‘chlorophyll’ chickens and all the rest of it”

        I think “chlorinated chickens”

      2. Modern monetary theory is about to be tested. It will fail
        Governments can just fund themselves by printing money. Pity the smart investors are not buying any of it.
        Elmer Funke Kupper
        AFR Contributor
        Feb 17, 2021 – 4.20pm

        More rubbish being printed about MMT

      3. “Governments can just fund themselves by printing money. Pity the smart investors are not buying any of it.”

        If they are not buying any of it, then it will be spent. If it is spent then it causes taxation which precisely offsets any initial “funding”, resulting in a net zero.

        The less “smart money” that holds government spending the lower the “deficit”.

      4. “smart investors are not buying any of it”

        But in financialized western economies most investing has no positive effect on production and consumption. Most investing is blowing asset bubbles. If we marginalize the smart investors and keep them from dragging away all the medium of exchange, we can produce and consume and things will go just fine.

      5. The logic here doesn’t make much sense the EU are accused of being “too conservative” by applying a too restrictive fiscal collar causing poverty (which is largely true) then Bill is now accusing them of being “too liberal” by being too lax on their banking standards ( which is probably also true). Define the true EU attitude of mind appears a not very relevant game for today! Sorry Bill.

      6. Dear Schofield (at 2021/02/18 at 3:00 am)

        Thanks for your comment. But my position is totally consistent. As MrShigemitsu notes a neoliberal regime is tough on fiscal policy when it benefits the people but easy on policy when it benefits the corporations.

        It is not a conservative/liberal issue. It is a bias towards capital issue and against workers.

        best wishes
        bill

      7. Fair comment Bill and MrShigemitsu but it still doesn’t explain why the Conservative government in the UK should be getting tough on capital adequacy rules. I tend to think of this party attracting much of its party funding from the finance sectors which includes bankers.

      8. Contrary to Tory party protestations about cutting red tape, the reality is that the UK really does love a good dose of bureaucratic control.

        In this case, Bill thinks that the increased regulations are a good thing, but I don’t think the reality is that this is to do with being free of neoliberal control.

        The neoliberal EU is also very fond of bureaucratic control, which numerous small UK businesses are finding out, now we are outside the EU, as they try to wade through complex VAT rules, and costly product licencing requirements. In many cases this has resulted in the loss of an export market.

        It seems to me that a defining feature of a technocratic neoliberal institutions is bureaucratic control.

        I think Bill just happened on the black swan.

      9. @Schofield Maybe the UK think that the rules should be tightened so as to warn off bankers from pushing their gambling habits quite to the extent that they did prior to the GFC. The government does though, still expect them to boost consumer spending on the back of profitable debt rather than relying more on much needed public spending.

      10. “a lacunae” tut tut… however just posted this on FB in response to a query whether there are any benefits to Brexit, illustrated with photo of someone looking under a drain cover.

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