07 September 2015

Deepening EMU – Round-up of Key Events – August 2015

Political

The European Commission signed the third ESM programme for Greece, after which Greek PM Alexis Tsipras resigned and called for a snap election on 20th September. We’ll see what outcome the Hellenic polls will bring, but in the meantime, Chinese stock markets turmoil may be a bigger concern for the global economy: what could be the consequences to a still fragile European economy in the event of a serious slowdown in China?  Raoul Ruparel analyses how exposed the EU is to a Chinese crisis in Forbes.

The ‘ever closer union’ concept established by the Treaty of Rome was brought to the present by French PM François Hollande, who called for a 'eurozone government' to further integrate member states as an answer to the muddled response to the Greek debt crisis. This ‘Jacques Delors' vision of the EU was supported by Italian MP Pier Carlo Padoan, who called for ‘political union’ in the eurozone to save the euro. The Financial Times also engaged with this appeal, and asked Berlin to lead the vanguard. Finally, German Think-tank CEP presented an innovative idea: a sovereign default regime for the euro area which would allow again member states to make their own decisions, and would prevent future sovereign debt crise.

But some perils arise from more integration:  VoxEU warns that if further integration is to take place, it has to be done for the good of all the different populations within the EU. Reuters advised against political and economical union, and the Financial Times argued that “flexible federalism remains the least bad option” for the survival of the single currency.

The ECB has been making the case that further integration may be beneficial for the EU economy through its spokespersons: Benoît Cœuré explained that the two key lessons drawn from the European crisis were that “the people of Europe are truly attached to the single currency and that our institutional framework is not yet sufficient to complete Economic and Monetary Union”. For his part, ECB’s Korbinian Ibel described how the Single Supervisory Mechanism works during a conference held by the CFS.

The fear for a Brexit has turned this summer into a British government ‘European tour’ seeking for support for its EU reform plan, with PM Cameron and Chancellor Osborne meeting with various European leaders. Open Europe wonders how does the UK vision for EU reform fit with the Eurozone’s challenges? It also recognises that “Britain has a unique opportunity to change the direction of the EU, making it work better for both Britain and its other member states”.

Financial

Banking

The BIS issued a study analysing how has the Countercyclical Capital Buffer affected mortgage pricing after Switzerland became the first country to activate this Basel III macroprudential tool. It also published a FAQ document on the standardised approach for measuring counterparty credit risk exposures under Basel III.

The EBA published technical advice on protected arrangements in a resolution situation in response to a request for advice from the European Commission. Additionally, the Banking Authority consulted on technical standards on exemption of NFCs from CVA risk charge.

The current weakness of European banks is an important matter of concern for regulators and influencers: the EBA published key information on the systemic importance of the 37 largest banks in the EU, which Bruegel considers to remain vulnerable unless urgent restructuring. The eurozone’s small and medium-sized banks remain under considerable stress too, according to VoxEU. All of them might be subject to EU’s 2016 stress tests, which will include 50-60 euro zone banks as said by ECB’s Nouy.

The Financial Times reported that the ECB has doubled the time needed to review banks’ risk models, giving itself up to four years for the review. However, national laws may be hampering ECB's work as single supervisor, which may increase the need for the rules to be harmonized.  Supervision and more regulation might indeed be the near future for the world’s largest banks if they continue to fail to reform its culture and conduct, as revealed by a long awaited report by the Group of Thirty.

A BBA study acknowledged that the future of banking is digital and increasingly mobile, and wondered whether banks would be able to satisfy the digital generation. They may not have a choice given the latest analysis’ results: the Banking Authority also released new ONS data showing the rise of FinTech and consumer-led trends in digital banking. As for payments, the results of latest EPC poll revealed that instant payments are most likely to trigger the next wave of innovation, and VocaLink published a study which confirms that the impact of mobile and payments apps are clearly indicating a rapid cycle change in the industry.

Securities

The ECON released its draft reporton stocktaking and challenges of the EU Financial Services Regulation, a document that shows the way forward towards a more efficient and effective EU framework for Financial Regulation and a Capital Markets Union. But the efforts to build a CMU are stirring banker’s concerns as it might be seen as a way to reducebanks’ role in funding EU companies, according to a senior German banker quoted by the Financial Times. For SMEs, though, initiatives under the Capital Markets Union umbrella can help to reduce their financing gap.

The European Commission published new rules on central clearing for interest rate derivatives in the form of a Delegated Regulation—the first such to implement the clearing obligation under the EMIR. ESMA recommended changes to EMIR framework and consulted on the review of EMIR standards relating to CCP client accounts. In this regard, the ESCB issued a report on the need for any measure to facilitate the access of CCPs to central bank liquidity facilities. The ESMA also advised the Commission on the implementation of the CSD Regulation.

The Bank for International Settlements released its criteria for identifying simple, transparent and comparable securitisations together with IOSCO. The latter also published a review of implementation progress in the regulation of DMI.

The combination of the Dodd-Frank Act, EMIR, MiFID II and Basel III signify the biggest regulatory changes in decades and have resulted in deep structural transformations to the markets as TABB Forum describe them.

The FSB reported progress in implementing the OTC derivatives market reforms, finding that it is well underway. This type of securities, as well as CCPs and trade repositories, are the core of regulation EU No 648/2012 which has been under consultation by the European Commission: responses by PensionsEurope, ICMA AMICand ALFI were published.

EFAMA and Insurance Europe released their response to the EU Commission’s consultation on the review of EMIR, while ISDA and AFME responded jointly to EBA's consultation on draft RTS on the valuation of derivatives.

Asset Management

ESMA published its advice in relation to the application of the AIFMD passport to non-EU AIFMs and AIFs, after what AIMA urged faster progress on making the passport available for third country jurisdictions. The ESMA also launched a consultation on draft RTS under the ELTIF Regulation.

VoxEU published a column against the suggestion of some financial authorities that have proposed designating asset managers as SIFIs, arguing that this would be premature and probably ill conceived.

IORP rapporteur parliamentarian Brian Hayes disclosed planes for stopping the introduction of a holistic balance sheet.

Insurance

The coming into force of Solvency II by the end of this year represents a crunch time for insurers, in the Financial Time’s opinion. But the results of a survey by Insurance Europe showed otherwise, stating that Europe’s insurers are making significant progress towards implementing these financial safety standards. BaFin supported this outcome, reporting that German life insurers are prepared for Solvency II.

EIOPA is to hold a public hearing on its final advice to the European Commission on infrastructure investments, while ESMA published the responses received to its discussion paper on PRIIPS key information document. Insurance Europe, ALFI and EFAMA responded to the ESA's technical discussion paper on PRIIPs. Lastly, Insurance Europe answered to EIOPA’s consultation on the infrastructure advice.

Corporate Governance / Accounting

A FEE survey revealed that the scope of audits of European banks regarding regulatory reporting vary widely between EU member states.

EFRAG published a feedback report on the results of the pre-endorsement questionnaire on IFRS 9 and will send out its qualified endorsement advice on IFRS 9 very soon.

Financial Services Policy

PwC published a report on the state of global financial market liquidity, concluding that there are grounds for policymakers to review the calibration of reforms to date and the ongoing regulatory agenda, in order to properly understand the effects of regulatory initiatives by asset class.

© Graham Bishop