27 January 2010

January 2010 - with Podcast

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OVERVIEW

The Spanish Presidency set out its stall for the next six months while prospective Commissioners were grilled on their plans for the next five years. So ECOFIN will focus on improving the financial sector’s regulation and supervision as one of the backbones to overcome the crisis. The Spanish Presidency will work jointly with the European Parliament to put in place, as soon as possible in 2010, the new financial supervisory arrangements; negotiate the Capital Requirement Directive and foster agreement within the Council to negotiate the AIFMD. But the long list of other topics includes crisis management measures in financial institutions; Deposit Guarantee Funds; reform of the Market Abuse and Prospectus Directives; improving the investors’ compensation scheme, regulation of PRIPS (financial products marketed outside the scope of sectoral directives); the regulation of OCT derivatives markets; revision of the Financial Conglomerates Directive and progress in the internal market of retail financial services. 

Commissioner-designate Barnier underlined that he is committed to the European project and will defend the European common interest so will not take orders from Paris or London. But international coordination is a key element in the strategy so G20 recommendations will be implemented and Europe must be the driving force alongside the US. On the issue of financial supervision, Mr Barnier encouraged the EP by saying that it would be good to move back to the original Commission proposal giving more powers to the ESAs, and there will be a proposal to create a legal framework for crisis management and resolution. These plans probably portend an early clash between Parliament/Commission and Council.

He presented a set of legislative proposals that runs to around 27 items for financial services. These cover CRD4, derivatives (a top priority) and post-trade structures generally, responsible retail lending, SEPA migration deadlines, consumer financial education, accounting and auditing standards and many more. All in all, the next five years will be very busy – right across the financial services spectrum.

ECON Chair Sharon Bowles noted that both Barnier and Almunia signed up to their ‘pledges’ thus “making sure these new Commissioners ... work closely with MEPs from an early stage” – an interesting form of regulatory capture.

Across the Atlantic, the spirit of G20 co-operation seemed to be rather less noticeable as President Obama suddenly announced that ‘Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers..Never again will the American taxpayer be held hostage by a bank that is too big to fail”. But this was after he suddenly announced that “We want our money back – and we’ll get it! ...My commitment is to recover every single dime the American people are owed." How Europe will respond to these initiatives is not yet clear!

However the G20 process is still casting a long shadow at the technical level as the Central Bank Governors and Heads of Supervision reinforced the Basel Committee reform package for strengthening the resilience of the banking sector and the international framework for liquidity risk measurement, standards and monitoring. The BCBS should deliver a fully calibrated and finalized package of reforms by end-2010. The FSB said it is essential to raise the quality and level of capital in the banking system.  After the confusion about remuneration policies in different states, the FSB distributed a template to collect information from national authorities December 2009 with an initial review to be completed by March.

European banks particularly welcome the fact that their recurrent call for a comprehensive assessment has been taken into consideration – not only of all the measures in accumulation, but also of their calibration and interdependencies. The EBF supports the need for international harmonisation of prudential and accounting standards, thus ensuring a level playing field between banks. It stresses that otherwise, the variations in national definitions of capital, leverage ratios, and the provisioning systems and countercyclical buffers will create an unlevel playing field, with potential risks to systemic stability as a result.

In the background, the problems of the Greek government deficit are looming as ECOFIN welcomed the Commission's examination of the statistical issues. But there could be a regulatory issue: This author has argued for the past two decades that the credit quality of government debt is intrinsically altered by participation in a monetary union. The time may come when it is no longer tenable for regulators to argue that government debt should be zero risk-weighted for banks when ECOFIN is demanding urgent action, and both market and ratings are priced for significant default risk. Such recognition would strike at the heart of the analytical framework underpinning Basel/CRD.

The users of OTC derivatives made their voice heard forcefully. More than 160 non-financial companies based in Europe have signed a letter prepared by the European Association of Corporate Treasurers to the Commissioner to urge reconsideration of the proposals being drafted to regulate the derivatives market. Also, the UK authorities have objected to forcing standardised OTC contracts onto organised trading platforms. In other parts of the infrastructure, the ECB consulted on the provision of a data-handling infrastructure for ABS loan-by-loan information so that disclosure standards are increased.

The Spanish Presidency published some notes on the AIFMD to analyze the regulatory models embedded in both the Council’s and the Parliament’s drafts. The document should contribute by describing and comparing the options and solutions put forward by both institutions for the usual seven issues. This process really shows that “co-legislation” is quickly becoming embedded in the system.

The debate about the role of institutional investors in exercising their rights seems to be developing as the UK’s Financial Reporting Council consulted on its stewardship code for UK listed companies. But the effectiveness of this approach depends on sufficient investors being willing, directly or indirectly, to put resources into engaging actively with the companies in which they invest. The FSA’s Lord Turner called for close engagement between accounting standard-setters and prudential regulators of banks as the issues about the exact definition of capital become ever more intense.

Graham Bishop

© Graham Bishop