Bank resolution in the European financial architecture

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speakers: Joanne Kellerman, Single Resolution Board
Chair: Charles Enoch, St Antony’s College, Oxford

The euro area crisis is often described as ‘vicious circle’ between sovereigns and banks. At its core, this is generated by a dilemma regulators face when a bank is likely to fail – should they leave the bank to go bust and face the consequences or should they use public money to provide a bailout? As Joanne Kellerman argued in her talk, at its core is a question of whether there is a trade-off between financial stability and market discipline. In response, Kellerman analyzed the role of the Single Resolution Board (SRB), the new European agency charged with taking decisions on resolution, of which she had been a member since its inception in 2015.

Kellerman began by reviewing briefly the crisis experience and the regulatory response. Given the lack of centralized supervision and resolution, when the crisis hit states intervened through the ring-fencing of assets and the provision of taxpayer lifelines to banks. This in turn transformed a banking crisis into a sovereign debt crisis and unleashed the ‘vicious circle’. The EU, after taking a set of emergency measures, sought to overhaul the structure of financial supervision by the creation of set of new bodies. Meanwhile, the problem of ‘too big to fail’ received increasing attention in global forums such as the FSB, which were in the process of being translated into European legislation.

Brexit and its impact on the Western Balkans

Ivaylo Iaydjiev (St Antony’s College)

Speaker: Peter Sanfey, European Bank for Reconstruction and Development
Chair: Jonathan Scheele. St Antony’s College, Oxford
Discussant: Adis Merdzanovic, St Antony’s College, Oxford

The impact of Brexit on the UK, Europe, and the world are discussed almost daily in the press and much uncertainty remains. Yet, often lacking from such discussions are its indirect impacts on third countries, such as those in the Western Balkans. In his talk, Peter Sanfey presented new research carried out by the European Bank for Reconstruction and Development on the impact of Brexit on Serbia, Montenegro, Bosnia, Albania, FYROM and Kosovo. His remarks were followed with a brief analysis of the political implications by Adis Merdzanovic from St Antony’s College.

The Western Balkans face an important convergence challenge. Currently, their income is around half of that of other Eastern European countries, and only a quarter of that of Western European countries. Yet, there have been some positive developments, with growth projected to average 3% in 2017, a stable macroeconomic situation, and declining non-performing loans. Over the medium term a set of factors enhance their attractiveness to investors: the prospect of EU membership, good relations with the IMF, a geographic location at a crucial point of China’s New Silk Road, the diverse range of economic activities, and favourable tax and labour costs.  

European Banking Union: The unfinished agenda for a changing Europe

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speaker: Christos Gortsos, Law School of the National and Kapodistrian University of Athens

Chair: Adam Bennett, St Antony’s College, Oxford

The decision on 29 June 2012 to go ahead with the creation of the European Banking Union (EBU) is often seen as a key turning point in the euro area crisis. The stated goal was, boldly, to “break the vicious circle between banks and sovereigns”. In his talk four years later Prof. Christos Gortsos took stock of how far this has been accomplished and what remains unfinished. In particular, he focused on the key asymmetries in the three main pillars of the EBU: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the prospective European Deposit Insurance Scheme (EDIS).

Prof. Gortsos began by drawing an important distinction between rules and institutions. According to him, the harmonized rules that form the Single Rulebook are a byproduct of the Global Financial Crisis and are based on global rules such as Basel III or FSB recommendations. However, the EBU represents an evolution in the institutions that implement such rules. Thus, by addressing the asymmetry between increasingly Europeanized rules and their enforcement by national authorities, the EBU should be regarded as a specific consequence of the euro area crisis.

Restoring trust in finance: Competition or moral motivation?

Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: Gordon Menzies, University of Technology, Sydney (with Donald Hay and Thomas Simpson)

Chair: David Vines, Balliol College, University of Oxford

Banking suffers from a trust problem. A post-crisis YouGov study found over 70% of respondents agreeing that “Banks aren’t doing enough to get us out of this economic crisis which they helped cause”. In his PEFM seminar in Michaelmas term, Gordon Menzies (University of Technology, Sydney) presented research on the means of restoring trust in banking, arguing that greater competition alone cannot increase public trust in banks. Instead, Menzies argued that bankers’ motivations must be addressed; in order for banks to earn stakeholders’ trust, they must invest in ethics education and professionalization as measures to encourage moral motivation.

Banking did not always have the distrusted reputation it has today. Menzies began his presentation with a history of late 19th to mid-20th century “gentlemen bankers” in Britain. These bankers enjoyed a well-respected reputation for conservative and reliable banking based on personal relationships and close knowledge of their customers. Bankers’ pay was moderate, and the business was not characterized by the cross-selling and conflicts of interest that are now pervasive. 

This all changed with “Big Bang” deregulations in the late 1980s. Menzies pinpointed these reforms in financial markets as leading to changes in British banks’ motivations and behavior. Risk-taking increased rapidly, as did bankers’ remuneration. This risk-taking on its own is not morally objectionable, as Menzies pointed out. Bankers’ behavior can be thought of as a “right to be rogue,” a right purchased with the high returns acquired through risky investments. Investors and customers may countenance rogue behavior as long as it yields them substantial returns. 

The future of banking and the role of challenger banks

Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: Cyrus Ardalan, Chairman, OakNorth Bank
Chair: Alexandra Zeitz, St. Antony’s College, University of Oxford

The banking sector in the UK is undergoing a transformation. In 2010, the Bank of England issued the first new banking license in one hundred years to Aldermore. From 2013 to 2016, 14 new banks have received licenses, and there were reports in mid 2016 that a further 20 new banks had applied for licenses. This proliferation of new “challenger banks” is reshaping the financial landscape in Britain.

Cyrus Ardalan, formerly Barclays Vice Chairman (Investment Banking), is the new Independent Chairman of OakNorth Bank, a challenger bank specializing in financing to small and medium-sized enterprises (SMEs). In his presentation at PEFM this term, Ardalan gave an insider’s perspective on the changes in the British banking sector and gave his explanation for the rise in challenger banks, which he chalked up to regulatory changes and technology shifts. 

The British banking sector remains highly concentrated. The “Big Five” banks (HSBC, RBS, Barclays, Santander, Lloyds) control 90% of the market in personal banking, corporate financing and SME lending. Nevertheless, challenger banks are reshaping the landscape. These include larger challengers such as Clydesdale and Yorkshire, TSB, and Handelsbanken, which in many cases are longer established and have relatively large portfolios of loans. Smaller challengers such as OakNorth, Metro, Aldermore and Shawbrook received their licenses in the more recent profusion of banks. Retailers offering financial services, such as ASDA, M&S or Tesco, are also challenging the dominance of the Big Five, but are not “challengers” in reshaping the model of banking, according to Ardalan. 

A pragmatic approach to reform of banking governance and culture

Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford

Speaker: John Mellor, University of Leicester

Chair: Adam Bennett, St. Antony’s College, University of Oxford

What does it take for a bank to be well governed? In Michaelmas term, PEFM hosted John Mellor of the University of Leicester for a seminar on reforming banking governance and culture. Mellor’s headline argument was that the quality of bank governance is directly shaped by a bank’s culture, which in turn is defined by the purpose or objective that the bank sets itself. He used case studies of three well-known banks, Nationwide, Rothschild, and Barclays, to illustrate the determinants of high and poor quality bank governance.

While it is oft discussed, Mellor suggested that bank governance is in fact poorly understood. He argued that analysis of bank governance must begin with the bank’s board of directors, since the directors hold ultimate responsibility for the bank’s conduct. Governance, from the bank’s board downward, is influenced by both internal and external factors. Internally, bank governance is shaped by the ownership of the bank, its business model and history, while important external circumstances are the competitive and political environment and the structure of regulation. 

Ethics and cultural assimilation in financial services

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speakers: Alan Morrison, Saïd Business School, and John Thanassoulis, Oxford-Man Institute, University of Oxford

Chair: Natalie Gold, King's College London

With a string of scandals in finance in the last few years, it is not rare to hear people lamenting the decline of ethical behavior in the industry, including the Archbishop of Canterbury and Pope Francis. In their new paper, Alan Morrison and John Thanassoulis want to go further and understand the causes behind the many failures.[1] Drawing on the use of contracts of finance and their role in incentivizing certain behavior and fostering a culture, they present an elaborate model of cultural assimilation in a professional services firm.

The starting point for their argument is the moral dilemma that bankers face in acting on behalf of their clients. In considering the trade-offs of actions that are simultaneously harmful to the client and profitable to the company, traders are likely to be affected by cultural standards and the tone from the top. The question then becomes how performance pay affects such decisions and why a principal might decide to create a less ethical culture. Their model includes two versions of the actors, one based on a utilitarian Benthamite conception that focuses on increasing the aggregate welfare surplus, and the other based on Kantian duty ethics that consider actions separately from their context.