01 December 2009

November 2009 - with Podcast

A podcast of this Overview is available here

 OVERVIEW

The European Council effectively ordered their Finance Ministers in ECOFIN to reach a conclusion in December on the new supervisory structure. So they probably will. But the EU is now getting used to operating a bi-cameral legislative system, especially as that is now fully in force via the Lisbon Treaty. Thus ECOFIN agreement is not the end of the matter and the Heads of Government recognised that by asking the Presidency to initiate the process with the European Parliament on the draft Regulation and Decision.

But the Commission has already noted that “some Member States want to substantially reduce the level of ambition, and to also significantly limit the powers that could be entrusted to the Authorities. This would lead to the creation of paper tigers, this being to the detriment of financial stability and to the consumer. The Commission therefore counts very much on the Parliament to maintain the high level of ambition of our proposals.” Parliament’s Rapporteur on the ESRB proposal has made it clear that she sees most MEPs as being unwilling to accept what the Council is doing in cutting back the powers of the new bodies. So the stage seems to be set for a serious clash between the Parliament and Council – with constitutional overtones echoing all the way to the final agreement that everyone still wants so the new bodies can take up their role in 2010.

However, the Heads of Government also called on ECOFIN and the Commission to ensure thorough preparation by the European Union of future G20 meetings. The Commission is fully alive to the need to work with its international partners to achieve an appropriate level of consistency in global approaches. Across the Atlantic, Fed Chairman Bernanke called for a strengthening of consolidated supervision, setting up a mechanism (such as a systemic oversight council) to identify and monitor risks to financial stability. Senate Banking Committee Chairman Dodds announced “Our proposal will replace the myriad government agencies that failed to rein in risky schemes with a single, accountable federal banking regulator”. So there is an urgent need to ensure both parties produce sound legislation that is globally consistent.

Meanwhile, the Commission proposed to make targeted changes to existing financial services legislation to ensure that the new Authorities can work effectively. In particular, these proposals lay down in detail the scope for the Authorities to exercise their powers, ensuring a more harmonised set of financial rules through the possibility of developing draft technical standards, settling disagreements between national supervisors and facilitating the sharing of micro-prudential information.

Away from the formal legislative process, many officials and commentators continue to add their voice to many aspects of the debate. The ECB’s Trichet said that “profits earned should be used – as priority – to build capital and reserves, rather than to be paid out as dividends or undue compensation.  The Bundesbank’s Weber pointed out that making the financial system more stable is a manageable task. The real challenge is to make it more stable without significantly hurting economic productivity. The FSA’s Turner also focussed “on the positive functions that banks  

and other financial institutions must perform in a successful economy – the not only socially useful but vital functions of linking savers to productive investment, allocating capital to efficient use, and providing savings, credit and payment products to individuals, companies and institutions."

In the private sector, Véron argued that Europe’s banks still need restructuring and government finances are being stretched to an unprecedented limit.  Buiter argued that the proposed European Systemic Risk Board is overweight with central bankers who would be conflicted in the use of their instruments by the potentially clashing demands of both price and financial stability. “The proposed construction does not allow for the proper representation of the financial industry.  Obviously, we do not want turkeys to turn up in large numbers to vote against Christmas.” 

The focus on grand affairs of policy should not distract from the continuing mass of actual measures that continue to build up the Single Market. SEPA on cross-border direct debits became a reality from Nov 2. At the same time, consumers in the EU started to benefit from easier bank account switching to another within their own Member State. This improvement is thanks to a set of 'Common Principles for Bank Account Switching' which was adopted by the European Banking Industry Committee (EBIC) ( IP/08/1841 ) last year.

The Commission's CCP proposals  for OTC derivatives continue to stir concern  as they could cause 'undue regulatory complexity' – according to the Futures and Options Association and a worry that is being expressed with increasing force, not just by dealers and intermediaries, but by market users.  While there is much to support in the Communication, much will also turn upon the detail. In the insurance world, CEIOPS launched a consultation on its third set of Advice on Solvency II - Level 2 implementing measures.  There are 16 consultation papers in this wave. And they especially welcome comment on SCR standard.

The IASB and FASB reaffirmed their convergence plans and agreed to intensify their major joint projects and the Boards reaffirmed their commitment to bring about the convergence of their accounting standards.  Moreover, the FASB met Japan’s Accounting Standards Board to discuss global convergence in their shared pursuit of global convergence of accounting standards.
The Bundesbank’s Weber underlined that it is of the utmost importance to further promote the convergence of international and US accounting standards – “unless we want to continue to compare apples and oranges.”

Accordingly, the IASB issued a new IFRS 9 on Financial Instruments and made significant changes in its initial proposals on using a single approach to determine whether a financial asset is measured at amortised cost or fair value replacing the many different rules in IAS 39. So it was all the more surprising that, after all these commitments to convergence, suddenly EFRAG decided that more time should be taken to consider the output from the IASB project to improve accounting for financial instruments.

November also witnessed a flurry of competition decisions and Commissioner Kroes said “KBC, ING and Lloyds – one quarter of the job is done, but there are 28 cases to go”. Each of these banks will contribute substantially to the financing of its restructuring. At the same time, the plans ensure that none of these banks will enjoy an unfair competitive advantage as a result of the very large-scale public support they have received.                  


Graham Bishop

© Graham Bishop