05 December 2019

157th Brussels for Breakfast – CPD Notes

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by CISI and with co-presenter Pablo Portugal (AFME). This blog complements the subsequent 48th Brussels 4 Brunch 30-minute CISI webinar that is also available to Friends of GrahamBishop.

Brexit

We have agreed not to cover Brexit but – ahead of next week’s election - I could not resist quoting Cathryn McGuiness’s (Chair of City Policy and Resource Committee) article that exports of professional and financial service to the EU have risen to £32.6 billion in 2018 – now up to 40% of the total.

People

The new Commission is now in office – but without a UK Commissioner. The Commission has issued proceedings against the UK that specify all the steps taken to persuade the UK to make an appointment. Hopefully, the situation will have been regularised - one way or the other – before there is an opportunity to challenge the legitimacy of the new Commission. Vice President Dombrovskis has given many speeches recently – covering the full range of his new roles and reinforcing the view that he will be the key Commissioner on all matters about financial services. ECB director and SSM vice-chair Mersch has also been far more active in policy proposals. The High Level CMU Forum was agreed to have a good balance of nationalities and specialisations.

“Scholz plan”

It was never clear how much support he had in Germany and his failure in the SPD elections has probably made him a lame duck. In any case, the easing of the red line on EDIS was marginal – at best – and counterbalanced by the demand for re-assessing the 0% risk weighting of government bonds held by banks. Italy has pushed back very strongly.

Sustainable finance

Dombrovskis delivered a major speech in London and laid out the priorities: a Sustainable Europe Investment Plan (€1 trillion over 10 years); 25 % of EU budget and 50% of EIB lending; disclosure rules for financial market operators; get the “taxonomy” agreed (it may be done today – creating the green “gold standard” for global players; green finance initiatives (green bonds, mortgages etc.); will propose measures in Non-Financial Reporting Directive and green transformation through a “Just Transition Fund”. It is clear that the people’s expression of support for green ideals in the results of the European Parliament elections will indeed have an influence.

Banking Union

The ECB’s Financial Stability Report and the EBA’s report on Risks and Vulnerabilities make sombre reading. Yes – NPLs are still falling and are at reasonable levels apart from Greece and Cyprus; and capital is high, though perhaps at a plateau. But profitability is low and now falling again. Moreover, banks are already expecting a deterioration in loan quality. So there is a sudden burst of interest in bank insolvency procedures and resolution. But few of Europe’s major banks have a satisfactory living will. On top of this, Basel III “faithful implementation” would see a rise in capital requirements of €125 billion (latest EBA estimate) – about 8%. But there are inconsistent statements that Basel III will not be allowed to cause a rise in capital demands.

CMU

Dombrovskis again – “Rebooting the CMU”! He underlined the need for a deep and liquid capital market - a very understandable reaction in the light of the banking system’s problems. Moreover, he sees this as strategically important to boost the international role of the euro. He took the opportunity of his London speech to announce a temporary extension of the CCP equivalence regime but neglected to give the time scale. The mood of the meeting was that it was unlikely to be beyond the end of the Brexit transition period – so end-2020. There was also discussion about the review of MiFID II turning into MiFID III. For Brexited UK, that would quickly highlight the hard choice of following the new EU rule precisely or quickly becoming non-equivalent…

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