21 February 2018

Building the Brexit castle on a foundation of quicksand: 138th Brussels for Breakfast – CPD Notes

The Brexit shambles in Britain contrast starkly with the neat negotiation strategy in Europe. The EU would welcome back - with relief - UK's membership, but it is moving fast towards new horizons of reform and it has signalled it won't wait for anyone that isn't on board and fully committed.

Highlights from the “Brussels for Breakfast” meeting

We are now down to 401 days until we go over the Brexit cliff and the UK feels no nearer to laying out the details of what it wants. Perhaps this week’s Cabinet away day will finally reach conclusions but speeches from the Foreign Secretary and DexEU minister provided little clarity – especially after 62 MPs wrote to the Prime Minister setting out their own red lines.

For the financial services industry, the deadline for action is drawing perilously near. But what action? The volume of calls from across the Channel to get on with applications for banking licences grows louder with comments that only a handful of licence have been issued. But it seems that many are under discussion and what about firms that simply want to extend their existing activities? Nonetheless, it was accepted that there would be capacity constraints among EU regulators if there is a last minute rush.

The precise mechanics of changing contracts generated fierce discussion: would the EU and UK just agree a legal text that makes the conversion? Or would clients have to agree contract by contract… and when would the agreed changeover date be? And what would happen if suddenly there is a transition of some unknown length? Many questions!

On the mainland, the economic and monetary “guard” is changing: the Eurogroup President and President of the Euro Working Group went off uneventfully and with continuity, but the ECB Vice- Presidency was rather different. A `southern’ serving finance minister with limited experience of monetary policy was catapulted into the job. What does that mean for the big job of ECB President? The favourite remains a `northerner’ and BuBa President Weidman is clear favourite  - ahead of Banque de France’s Villeroy de Galhau.

In the technicalities, we discussed the impact of IFRS9 disclosure guidelines. As banks are required to publish expected losses with and without the permitted smoothing, we were at a loss to understand why bondholders would do anything except look at the full impact. But a cynical – and seasoned – participant suggested it may have more to do with profits that drive executive remuneration…

Naturally, MiFID II was a topic – focusing at this stage on the impact on research. The feeling was clear that a major reduction – even of worthwhile research - was inevitable. SBBS were discussed and I expressed the view that the ESRB report may be the end of the road… but a “safe asset” for banks remains essential – as does a “risk free” euro interest rate to serve as a benchmark. My plan for a Temporary Eurobill Fund could meet both needs.

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These Notes for the Friends of Graham Bishop will be supplemented by our full Workbook for our CPD clients (link) – in conjunction with the 30-minute CISI webcast. We our “CPD Weekly – 10 Minute Read ‘n Verify” (link) complies with ESMA Guidelines

Key items of the rest of the month:

The foundations for the second phase of the Brexit talks have proven not to be very solid. Inspired by UK’s Brexit Secretary David Davis’ motto that “nothing is agreed until everything is agreed”, the top EU Article 50 negotiator Michel Barnier warned British officials against their backtracking in “substantial” agreed principles and flagged the risk for the UK of crashing out of the EU without a transition period in case that the deals achieved weren’t rapidly transposed into law – a major concern for MEPs. The UK Prime Minister has found battle lines in all fronts, with MPs at home calling for more reforms to her Withdrawal Bill. Theresa May faces also distrust among business, with more than two-thirds of companies not confident in Government's ability to negotiate with the EU.  

 

Under the negotiating directives for transitional arrangements adopted in January’s Council meeting and published by the Commission, Britain will be bound by EU laws but have no say over them, a friction point that May’s administration has tried to fight and that could threaten transition talks. The EU’s stance in this regard might have activated the ‘hard Brexit’ option: senior officials told POLITICO that the British PM plans for an ‘immediate’ break with the EU in trade or financial services after withdrawal, which has raised the EU27’s fears of a ‘bonfire of regulations’ that could undermine the bloc’s economy after divorce and resulted in the publishing of a strategy paper that threatens with sanctions in case of a regulatory ‘race to the bottom.’ Dispute settlement remains a key sticking point for the future trade deal, a Commission’s internal document suggested: a feasible option could be ‘docking’ with the European Free Trade Association (EFTA) Court as a dispute resolution body, wrote POLITICO’s Georgina Wright. [...]

It is high time for the UK to make a choice on Brexit trade future, reminded Michel Barnier, who warned that future trade barriers will be “unavoidable” if the UK chooses to leave the bloc’s customs union. If London presses ahead  with its plan to abandon the EU’s single market and customs union, the two-year transition proposed by the UK will be ‘practically impossible’ to achieve,Ireland’s junior finance minister warned - not to mention Brussels’ aim to reduce by three months that period and disconnect from London on 31 December 2020. Northern Ireland leaving the customs union is becoming an increasingly indissoluble issue, with a secret EU plan for keeping the British territory inside the customs union triggering a row between May’s Tories and Scotland. [...]

British banks are running out of time to guarantee access to the European Union’s single market after Brexit, the ECB’s Supervisory Board official Sabine Lautenschläger warned.   They should make sure they’re prepared for the possibility that the UK and the EU were unable to agree on a transition deal post-Brexit, ECB's President Mario Draghi said.  [...]

Economic

The European Systemic Risk Board (ESRB) published its long-awaited reports on Sovereign Bond Backed Securities (SBBS), an idea that was brewed in 2011 by the consequences of the Great Financial Crash and that consists in creating a new class of “safe assets” through a securitisation of euro area government bonds. They are a great idea, but they fall behind in tackling the much wider problematic picture that a Temporary Eurobill Fund (TEF) would seek solutions to, as Graham Bishop assessed.

The arguments, eloquently addressed  in a recent EU Vox paper that proposes six reforms– three of them were subject of reflection by Graham Bishop-, go from a safe asset; to direct contribution to financial stability; as well as global scale issues of great liquidity; flexible and progressive market discipline to enhance economic governance; or a genuine fusion of euro area citizens’ economic interests into a `European asset’ that can be a core savings instrument for all. [...]

Full article available for consultancy clients here