21 July 2008

Graham Bishop's Overview - July 2008

Graham Bishop's Personal Overview :  At this time of year, the policy players in Europe’s financial services industry traditionally focus more attention on forthcoming holidays. But this year is rather different as the drive to legislate s

Graham Bishop's Personal Overview

 View Full Article:  July Financial Services Month in Brussels

 At this time of year, the policy players in Europe’s financial services industry traditionally focus more attention on forthcoming holidays. But this year is rather different as the drive to legislate solutions to the “turmoil” is being pushed rapidly forward ahead of the 2009 deadlines of EP elections and a new Commission.

The incoming French Presidency has set the pace and will concentrate on the implementation of the roadmap for financial stability, an agreement on “registration” of Credit Rating Agencies, and the amendment of the Capital Adequacy Directive. But supervision of cross-border financial groups; a European passport for fund management companies (in amending the UCITS Directive), and clearing and settlement issues (especially T2S) all feature on the list.

These priorities seem to chime with Commissioner McCreevy’s wish-list. Supported by ECOFIN, he will propose a “registration and external oversight regime for rating agencies” – despite the doubts expressed by EBF, especially if the whole process ends up with “credit assessments from a public body”. Changes to the Capital Requirements Directive will be proposed in early autumn and will require colleges of supervisors for all cross-border banking groups.

The ECB’s Trichet supported the latter though insisting that closer ongoing co-operation should be pursued not only between supervisors, but also between supervisors and central banks. But he argued to the Parliament that the recent financial market corrections did not provide any convincing evidence for the setting up of a new authority for EU supervision. In their annual report on the ECB, MEPs said the ECB has done “excellent work” in managing the financial turmoil, enhancing its reputation.

The private sector has also stepped forward with contributions and comments:
o A joint initiative of eight industry associations strongly objects to the Commission’s alternative proposal to amend the CRD to address incentives in the “originate-to-distribute” model. The new proposal aims to prohibit European investment in obligations where the originator or sponsor fails to retain a 10% interest in positions having the same risk profile. Apart from criticizing several fundamental flaws of the proposal they argued it will increase costs and damage the competitiveness of Europe.[Editors note: the speed of the consultation illustrates the risk that the 2009 deadline for legislation may produce serious “unintended consequences”]
o The Finance industry is consulting on its Good Practice Guidelines which focus on promoting sound, consistent and appropriately granular implementation of the CRD disclosure requirements relating to securitisation. Commissioner McCreevy pointed out that it will be very important to verify the effectiveness of these initiatives.
IIF Final Report on Market Best Practices proposed Principles of Conduct together with Best Practice Recommendations on issues such as risk management, compensation policies, valuation of assets, liquidity management, underwriting and the rating of structured products as well as boosting transparency and disclosure.
The European Banking Committee is the “Level 2 committee” for banking issues and its only communication to the public in 2007 seems to have been its annual report for 2006. In another illustration of the risk that the Commission’s openness may be one of the casualties of the “turmoil”, the EBC’s corresponding publication in 2008 has now been downgraded to just a short Newsletter.

Progress continues with the mammoth Solvency II proposal for insurance. ECON held a first consideration of the 821 amendments to MEP Skinner’s draft report. Amendments include the proportionality principle, investment rules, Minimum Capital Requirement, surplus funds, equity risk, information for policyholders, mutual groups, group support, colleges of supervisors, and pension funds. In reply, the French council representative noted that on group supervision a first compromise seems to be underway in Council but will be far away from the original Commission proposal.

Eventually, the Commission made its proposal on the UCITS review. The big surprise was the firm commitment to request advice from CESR by 1 November on the "management company passport", focussing on the structure and principles which should guide potential future amendments to the Level 1 UCITS Directive and to indicate the fields that could be addressed through Level 2 implementing legislation.

Developments in the EU’s financial infrastructure continue apace:
o The ECB launched the TARGET2-Securities project – run by Deutsche Bundesbank, the Banco de España, the Banque de France and the Banca d’Italia. Almost all euro area CSDs are in favour of the continuation of the T2S initiative, and are prepared to enter into a legally binding contractual arrangement by the end of the first quarter of 2009.
o The ECB launched the Collateral Central Bank Management project with a view to commencing live operations earlier than, or at the latest together with, TARGET2-Securities, subject to the outcome of a further detailed analysis of the synergies with TARGET2-Securities.
o The GSMA and the European Payments Council are to work together to accelerate the deployment of services that enable consumers to pay for goods and services in shops, restaurants and other locations using their mobile phones.

ECOFIN developed some key principles along which the further reform of the IASCF and IASB's governance and public accountability should be made. Among others, the Council underlines that the IASB must achieve greater transparency and legitimacy of its standard-setting and agenda setting processes. Meanwhile, the IASB responded to the credit crisis by summarizing its initiatives underway related to the credit crisis covering off balance sheet, fair value in illiquid markets and disclosure.

The United States authorities are continuing their calls for regulatory overhaul. “We need to design carefully and put in place a stronger capacity for resolution and crisis intervention that re-inforces market discipline”, Paulson said. “Financial institutions must be allowed to fail” - underlining that under optimal financial regulatory and financial system infrastructures, such a failure would not threaten the overall system. “Measures include strengthening market infrastructure in order to reduce the expectation that an institution is too interconnected to fail…To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large complex financial institution.”

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Graham Bishop

© Graham Bishop