29 June 2009

June 2009

Graham Bishop’s Personal OVERVIEW

In mid-June, the European Council took another big step forward in re-shaping financial regulation in the EU over the next few years. The European Council supported the creation of a European Systemic Risk Board and, in a sop to non-euro are States, agreed that the members of the General Council of the ECB will elect the chair of the European Systemic Risk Board. Council recommended establishing a European System of Financial Supervisors, setting up of supervisory colleges and establishing a European single rule book applicable to all financial institutions in the Single Market.

Importantly, Council decided that decisions taken by the ESAs should not impinge in any way on the fiscal responsibilities of Member States. It agrees that the European System of Financial Supervisors should have binding and proportionate decision-making powers in respect of whether supervisors are meeting their requirements under a single rule book and relevant Community law and in the case of disagreement between the home and host state supervisors, including within colleges of supervisors. ESAs should also have supervisory powers for credit rating agencies. All actions must be consistent with single-market principles. These are far-reaching “constitutional” decisions that are likely to have great ramifications far beyond the financial markets in due course.

It now seems that the Commission intends to bring forward around the end of September a legislative package which will consist of six texts. There will most probably be three Regulations that will regulate the three new supervisory authorities, another Regulation for the European Systemic Risk Board, one additional short text and one final text amending existing Directives on financial services. Clearly, negotiations on the amendments on the existing Directives and the creation of the Regulations for the three authorities will need to be carried out in parallel. But there should be no illusions about such complex issues sailing through easily. Many of the new Parliamentarians will be unfamiliar with the detailed issues and there will be a new Commissioner installed in the middle of the process. Having the new system running before the end of 2010 is a demanding schedule.

The most difficult debates may turn out to be with the UK as Chancellor Darling continues to label the “De Larosière” proposals merely “a good starting point for debate” and a key issue is whether the forthcoming UK government proposals for the UK turn out to be consistent with the EU’s plans. Recently, FSA Chairman Lord Turner was quite clear that the choice really is between the EU consensus and an effective single market. The political and economic stakes could not be higher. A Federal Trust report (with Graham Bishop as Rapporteur) argued that the British government should think long and hard before listening to calls to dissociate itself from this consensus. The position of the City is not so strong that it can afford to be marginalized in Europe and the British government needs the City to be at the centre of European and global finance, given its own funding needs over the coming years.

The British Bankers Association echoed many of these themes and the European Financial Services Round Table welcomed the recent progress made at the ECOFIN Council but highlighted the importance of defining the burden sharing. It will be critical to progress swiftly on this point with realistic proposals in order to equip Europe with an EU financial supervision framework.

Several ECB Board members discussed these issues and Bini Smaghi warned against wasting opportunities for reform as he feared the EU was unwilling to undertake wholesale reform as the forces pushing towards maintaining the status quo are already gaining strength. González-Páramo highlighted that “central banks can benefit from extended access to supervisory information especially in relation to systemically relevant institutions, in order to identify risks and vulnerabilities for the financial system as a whole in a more efficient way”. Wearing his hat as Chairman of the Financial Stability Board, Bank of Italy Governor Draghi underlined to IOSCO that the scope of regulation will be broadened: The need in future is to take a system-wide approach to the assessment of financial system and economic conditions, as well to the system’s regulation, rather than focus alone on the health of individual institutions, markets and products. “How to deal with too-big-to-fail institutions and related moral hazard concerns will be an important focus ahead.”

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These broad concepts have to come down to detailed policies that are implemented in practice. Commissioner Kroes reminded ECOFIN that temporary rescue measures will not take us out of the financial crisis and announced that the Commission will soon publish some guidelines for restructuring banks and returning them to viability. The Financial Markets Law committee (FMLC) commented on the Commission consultation on an EU-wide legal framework for securities holding and transaction and on how future EU legislation in this field could address the issue. The FMLC is concerned that it remains uncertain which law determines legal rights related to securities held through financial intermediaries. The ESCB and CESR launched their recommendations on post-trading infrastructures in the EU to promote competitive, efficient, safe and sound pan-European post trading arrangements. Meanwhile, SWIFT launched its Giovannini Barrier I Protocol to standardise communication within the European clearing and settlement landscape. This will be effective in March 2011 – just a decade after these barriers were identified!

CESR called for evidence on mutual recognition with non-EU jurisdictions to identify the different “regulatory areas” on which to concentrate a regulatory and economic fact-finding exercise. CEBS published two reports setting out the outcome of its efforts in assessing banks’ published disclosures in their 2008 audited annual reports. Generally, it showed improvements but the analysis of Pillar 3 disclosures indicates a need for further convergence.

The Commission launched a consultation to review of the Directive on Deposit Guarantee Schemes following the recent emergency amendment of the limits. The objectives will be to strengthen depositor confidence; enhance financial stability; protect a part of depositors' wealth; and enhance the Internal Market.

Solvency II may have been enacted at Level 1 but CEIOPS set out the timeline for consulting on implementing measures. The second set – for consultation between July and September - runs to 31 titles. The third set - for consultation between November and December – has 13 titles. The ABI Solvency II Bulletin provides a timeline setting out the major steps to be taken by insurers before implementation in 2012.

AMF General Secretary Thierry Francq said the Commission proposal on alternative investment fund managers (AIFM) raises some misgivings “It is possible that the scope of the directive will not extend to some funds that pose potential systemic risk while covering others that do not”. Also, the proposal lacks a clear definition on the role and liability of alternative fund depositaries. In the meantime, EVCA reported a considerable drop in investment and divestment levels: Private equity fundraising, investment and divestment activity fell during the first quarter of 2009, as investors focus on managing their existing portfolios and commitments. The data, released by EVCA, also shows venture capital and financing for SME’s proving more resilient in the face of the downturn.

Bruegel’s Veron argues that the IASB and its Trustees have made damaging mistakes but that Europe should think twice before attempting to bully the standards-setters into submission, as a number of policymakers and banking industry leaders currently advocate. While the International Financial Reporting Standards are not doomed to failure, there is significant risk of globally fragmented and divergent accounting standards, which would be a loss for everyone. The comment was timely as the European Financial Reporting Advisory Group (EFRAG) issued several comments including a criticism of the IASB’s de-recognition proposal and CESR criticised the lack of detail in IASB discussion paper on Revenue.

The European retail association (EuroCommerce) argued that the fees set by Visa and its member banks and imposed on retailers constitute an infringement of European competition law. At the core of the complaint is the infamous Multilateral Interchange Fee (MIF): when a customer pays with a Visa debit or credit card, the merchant has to pay to his bank a non-negotiable and completely opaque amount. The fact that retailers pay for benefits which go to others distorts competition between banks: the more banks compete, the higher the prices.

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Graham Bishop
 

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