Month in Brussels: Graham Bishop's Personal Overview of September 2012
“Banking Union” is likely to throw into sharp relief many of the issues that lie ahead for the progress of the two-stage van Rompuy Report on moving to a genuine EMU. As always, the issues boil down to ‘who pays?’ and how can that entity be sure that there is real accountability (really meaning ‘control’) over the large sums that are likely to be involved.
A new dimension has crept in: should ‘Europe’ become financially responsible for the ‘national’ mistakes of the past? It is easy to see that if Europe has collective control in the future – of banks and public finance – then it should pay collectively for any future mistakes of its own judgement. Understandably, taking responsibility for legacy mistakes is a different matter and this has become an acute problem for any Spanish application for a support Programme.
The Commission’s Resolution proposal is clear about separating a failing bank into the ‘good’ part and a ‘bad bank’. The good/bridge bank that contains the systemically important systems needs to continue. So the principle of the ESM recapitalising a clean, good bank (that might well be subject to ECB-driven supervision) should be straightforward. Why Europe should fund the past supervisory mistakes that are the assets of the bad bank is a different question.
ECON has already started work on the banking union legislation and the committee's opening discussion pointed to what are likely to be MEPs' key concerns: strong accountability of the supervisor, a clear division of tasks between EU and national levels, including non-eurozone countries, and differing supervision arrangements for different banks. Among the possibilities mentioned were empowering Parliament to: hold investigations, set the supervisor's budget, appoint its head and ask questions. Widespread concern was voiced on the danger that eurozone supervision could result in splitting the single market.
The EBA’s Enria pointed out that the banking union will have an impact on the EBA, as it will require an even stronger commitment to the Single Rulebook, and for a leap towards a Single Supervisory Handbook to assess the risks at banks and to trigger corrective actions. Without it, there is the risk of a polarisation of the Single Market between the euro area - with single rules and supervisory practices - and the rest of the Union, which would operate with a still wide degree of national discretion in implementing the Single Rulebook.
So it was not surprising that ECON Chair Sharon Bowles called on the UK financial services sector to stop being negative about European regulation or risk being marginalised. Bowles says the creation of a eurozone banking union represents a crucial moment for Britain’s membership of the EU, with many countries expecting Britain to leave. “European ministers from other countries are not taking any notice of the UK because they think it is on the way out.”
Banker behaviour also attracted much attention as the Libor scandal moves into the zone of remedial action. ECON agreed that benchmarks such as Libor should be anchored in observable transactions and should be transparent. They also said that benchmarks should continue to be set by private businesses such as banks, with data-based objectivity, but since integrity and trust are public goods, they should remain under public control and supervision. Speaking at the Hearing, Commissioner Barnier talked about tackling the culture of manipulation, what the systemic failures were, how widespread the problem is and what action is being taken.
The finer points of EMIR are now surfacing, as ESMA published the responses to the consultation on the Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories. It covers implementing measures for the application of the clearing obligation for risk mitigation techniques, exemptions for non-financial counterparties and intra-group transactions, requirements for CCPs, and reporting and disclosure obligations for trade repositories. ALFI suggested that ESMA should analyse the possibility of requesting more synthetic information, and think about the frequency at which the trade information should be refreshed, especially on collateral and valuation elements. ALFI regretted that the rules do not take into consideration the specificities of UCITS, and suggested that UCITS benefit from more flexible rules regarding collateral requirements. EFAMA also disagreed with ESMA about the scope of assets accepted as highly liquid collateral by a CCP. The scope of highly liquid financial instruments as collateral has to include - besides cash and bonds - other types of assets to support liquidity in the market, as well as main market index equities
ISDA-AFME-BBA-Assosim underlined that the derivatives business is the most global of financial businesses, and urged the European Supervisory Authorities and the European Commission to focus on the creation of a regulatory regime in Europe that is both coherent and convergent, in terms of its interaction with other regimes. They believe the G20 commitment to avoid protectionism, fragmentation and regulatory arbitrage is as important as any other. The associations are particularly concerned about the international application of the requirements for indirect clearing set out in the proposed RTS, to the extent that they conflict with local financial regulation in jurisdictions outside the EU.
The Basel Committee issued interim rules for the capitalisation of bank exposures to central counterparties (CCPs) that are intended to come into effect as of January 2013. BCBS Chairman Stefan Ingves noted that "capital requirements for bank exposures to CCPs is one of the final pieces of the Basel III capital framework, and we are pleased to have the interim rules established. The Committee recognises, however, that all components of the G20 reform agenda in relation to OTC derivatives are yet to be finalised.” CPSS-IOSCO issued a consultative report on the recovery and resolution of financial market infrastructures about issues that should be taken into account for different types of financial market infrastructures (FMIs) when putting in place effective recovery plans and resolution regimes that are consistent with the Principles and Key Attributes.
The insurance industry continues to struggle with the uncertainties of Omnibus II, and Insurance Europe welcomed the fact that the results of the impact assessment on measures to deal with long-term guarantee issues in Solvency II are expected to be known before the Omnibus II text is finalised. Legislators have recognised that measures are needed to ensure that the Solvency II framework measures the real risks faced by insurance companies' long-term business and does not create artificial volatility.
Moreover, Reuters reported that the EU may delay the new capital rules for insurers because of wrangling between member countries over the final shape of the new regulations. Commissioner Barnier has suggested delaying the so-called Solvency II regime by one year. The problem centres on the ultimate forward rate (UFR)-based extrapolation of the euro risk-free rate curve - a key determinant of solvency. All Solvency II negotiators have variations of the UFR-based extrapolation in their proposal, as the euro risk-free rate curve is based on the market swap curve up to 20 years, but extrapolated thereafter.
In asset management, the European Commission re-opened the UCITS debate – effectively opening the discussion on UCITS VI. It published a consultation focusing on product rules, liquidity management, depositary, money market funds and long-term investment policies. During the process leading to the publication of the UCITS V proposals, it was rumoured that the European Commission would extend the scope of its proposal to include product rules issues, but the Commission instead published a separate document and, according to Commissioner Barnier, opened the UCITS issue with "no taboos". The UCITS consultation is closely linked to the shadow banking regulatory stream that the European Commission is currently working on.
Public Finance - Debt, deficits and democracy: According to Ian Ball, IFAC CEO, fiscal policy can't be outsourced to independent bodies in the same way that monetary policy can. Instead, politicians must be forced to be more accountable and transparent to allow voters to make decisions based on accurate information. There is an urgent need for institutional changes that will make it more difficult for elected officials to ignore the full set of factors — liabilities, contingent liabilities – when they make either political promises or budgetary decisions. What is needed is significant institutional reform – reform that provides politicians with more powerful reasons to focus on long-term fiscal sustainability, and provides voters with better information about the current fiscal position and the implications of the fiscal policies the candidates are presenting. The accrual basis for accounting, budgeting and appropriations is necessary but not sufficient.
Graham Bishop
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Notes for Editors
Graham Bishop is renowned as a one-man think tank, with the vision and courage to propose radical ideas, yet ground them in a mastery of the technical details of the financial system. His influence at the meeting point of politics, economics and finance has built up particularly since the early 1990s, when he pointed out to the Maastricht Treaty negotiators that government debt would have a fundamentally different quality in a common currency. He played a key role in designing the changeover to the euro, both of national currencies and of Europe’s capital markets. His influence continues to this day - as the Rapporteur of ELEC’s insightful plan for a Euro-T-bill Fund, which would have profound political implications for the euro area, and for Britain, if implemented.
Graham now approaches his 80th ’Brussels for Breakfast’ meeting in the City of London - attended by a wide array of senior officials and government affairs specialists from major financial institutions.
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