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The latest chat on Basel III, the PSD and SEPA

This is an extract of the summary of discussions at the IPS conference, written by FSClub friend Heather MacKenzie.

For the past few years the regulation debate at IPS has tended to focus on SEPA and the Payment Services Directive (PSD), but with the mandatory end date regulation soon to be voted on by the European Parliament and PSD transposed into law in most EU states, other pressing regulatory issues shared the platform.

An intense regulatory age is bringing sweeping changes to the banking industry, said Elemar Terták, Director Financial Institutions, DG Internal Market and Services at the European Commission. The new regulations aim to design an international financial architecture that promotes efficient global resource allocation and a level playing field across all countries. "Banks should have stronger capital bases, greater reserves of liquidity and should not be too big to fail."

The day before the opening of IPS, the Payments Regulation Boot Camp enabled speakers and delegates to delve into the minutiae of the Payment Systems Directive, the SEPA end date regulation, Basel III, anti-money laundering and know your customer initiatives.

There were some familiar issues raised; for example, the PSD needs further tinkering as Carl Hassey, Senior Product Manager at Barclays Corporate put it. The PSD requirement for D+1 payment delivery and how it can be reconciled with payment systems that accommodate longer periods, such as the UK's BACS, which is based on D+3, was hotly debated. John Burns of the UK's Financial Services Directive pointed up that the regulator wrote to banks in August 2009, asking if they could comply with D+1, and received a resounding positive response.

Delegates were polled as to how important regulatory reform was compared with other strategic issues – 38% said it was equally important while 29% said it was on the top of senior management's agendas. Furthermore, 53% of delegates said regulation would have the biggest impact in capital and liquidity requirements, reflecting the increasing focus on the impact of Basel III.

Basel III

Concerns about the impact of Basel III dominated a regulation roundtable discussion on day two of IPS. The liquidity coverage ratio, for example, where banks have to set aside liquid assets such as government bonds, would affect liquidity facilities and clearing and settlement, driving up costs, said Dermot Turing, Partner, International Financial Institutions and Markets Group, Clifford Chance. Moreover, the net stable funding ratio would lead to banks pushing alternative financing structures on to corporate clients rather than traditional loans.

Atsushi Mimura, Director, Office of International Financial Affairs, Financial Services Agency, Japan, said Basel II had struck the right balance between strengthening capital requirements and ensuring economic growth. It was important that any new capital and liquidity requirements would not hamper financial intermediation and income growth.

Malcolm Porter, Deputy Head of Regulation Development, Group Treasury, RBS, told delegates at the Payments Regulation Boot Camp that a number of concerns remained for the industry regarding Basel III. These included the criteria for Level Two assets and the treatment of inflows. "The Basel Committee doesn't want lobbying from the banks on these matters – it wants clear data from us that will demonstrate exactly what will happen if certain measures are introduced."

SEPA and the mandatory end date

While progress towards SEPA credit transfer and direct debit instruments has been disappointingly slow, many of the IPS speakers expressed optimism about the prospects for the harmonisation initiative in the long term.

Francisco Tur Hartmann, adviser, market integration division, European Central Bank, said there were still challenges but the market should acknowledge that two new payments instruments – the SCT and SDD – have been delivered and are important for a single market in cashless payments. "SEPA has delivered faster, cheaper, easier and more secure payments. It also provides a platform for further innovation in electronic and mobile payments, electronic invoicing and contactless payments."

Work remains to be done, he said, on issues such as greater legal certainty, a European card scheme, interoperability between payment infrastructures and increased awareness of SEPA among end users.

Terták cited several reasons for slow progress in the transition to SEPA – uncertainty in the market, a difficult economic environment, potential disadvantages in being a pioneer in a network based industry, the lack of standards and the lack of a specific end date. "There are controversial issues that were raised in the SEPA mandatory end date directive proposals. Mandating the use of ISO 20022 will increase standardisation, transparency and competition. But this is a hard battle and progress will be slower in some countries than in others." The end date regulation will be helpful but only when technology is available to provide a platform for innovative instruments, he added. The e-money directive along with the PSD will bring a common platform for e-money initiatives across borders in Europe, attracting users who will be willing to pay more for convenient services.

Friso Spinhoven, SEPA Programme Manager, Ministry of Finance, Dutch State Treasury Agency, said he believed the SCT and SDD were too basic to trigger a large scale market-driven adoption. "In the Netherlands, the cost of a credit transfer is already quite low, so it is difficult to build a business case to migrate to SCTs." The advantages of SCT in delivering end-to-end remittance information was not enough as the domestic instrument usually sufficed and the investment required to migrate to SEPA outweighed the advantages in the short term. "You must look at SEPA in the long term – it is a huge project and will take a lot longer to pay back than three years. But SEPA will bring more competition to the market and we expect to see some interesting offers from foreign banks."

A focus on benefits for users should be the first thing to look at when reforming payments, said Joerg Pinkernell, Head of Financial Institution Product Management, Barclays. But this hadn't been the case with SEPA and there was yet to be a clear business case for corporates. Hartmut Bremer, SEPA Project Manager at Deutsche Bank, agreed with Pinkernell, saying a business case must exist for all stakeholders.

Ruth Wandhöfer, EMEA Head Market Policy and Strategy, Global Transaction Services, Citi, highlighted the need for harmonised market practices when implementing projects such as SEPA. "Anyone wanting to set up a single payments zone must harmonise these practices. We cannot really have on in Europe for thousands of different reasons, including diverse VAT rates and credit identifiers. Full circle processing doesn't yet exist in SEPA."


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Thanks for this article Heather. Risk in the Market has also written a post that explores the impact that Basel III and other changes in regulation will have on banks. As well as assessing the quantitative impact of Basel III on banks’ equity value and GDP figures, it considers Basel III from the perspective of the clients of the financial industry. http://riskinthemarket.thomsonreuters.com/2011/basel-iii/