29 October 2012

October 2012 Financial Services Month in Brussels

The October meeting of the European Council called for priority work on the Single Supervisory Mechanism (SSM) “with the objective of agreeing on the legislative framework by 1st January 2013”. A “specific and time-bound roadmap” is expected from President van Rompuy for the December meeting to ”move ahead on all essential building blocks on which a genuine EMU should be based… but characterised by openness and transparency towards non-euro area Member States.” So the objective is clear and the December meeting will probably be a landmark in the nature of the EU as the eurozone moves to deeper integration and some non-euro states move further to marginalisation.

Some of the difficulties in the banking union timetable were underlined by BaFin President König when she said: "The timetable is more than ambitious". ECON Chair Bowles also questioned the need to rush the banking union, given that it will not lead to recapitalisation of Spain's banks. Indeed, ECON’s draft report also points to the need for a realistic timetable for introducing the SSM, to allow time to ensure that the legislation is of high quality and enable the supervisor to prepare adequately. König also cited the German Finance Minister’s comment “quality must take precedence over speed”.

But she also highlighted the risk to the ECB’s independence from its accountability for supervision to “democratically legitimised bodies”. ECB Vice President Constâncio argued that the banking union should concentrate on supervision first - the question of deposit insurance could come later.

Even the legality of the Commission’s proposal for banking union has been challenged, but Eddy Wymeersch  (former Chairman of CESR) pointed out that using the Treaty provisions to give the ECB the “policy” role neatly sidesteps any ‘Meroni judgement’ problems about the Commission delegating its powers in a way that has bedevilled the ESAs. He also argued that the Treaty must have meant to give the ECB powers to implement its policies – as the converse would be absurd.

The Liikanen Group delivered its report and it proposed powerful remedies to the ills of the banking system – but explicitly stopped short of a legal splitting up of banks. Instead, the Group has gone for a bank holding company structure of legally (and IT) separate companies – but “the long-standing universal banking model in Europe would remain untouched”. However, the red lines between some of the entities still look quite wish-washy. Indeed Liikanen himself conceded to the UK’s House of Lords that the split between retail banking activities and market making/prop trading would face challenges of enforcement. He noted that in some areas of banking it would be harder to draw the line, and that bank governance would require strengthening in order to make sure that the new ring fence be observed.

Nonetheless, Martin Wolf – a member of the UK’s Vicker’s Committee - observed that the suggested ring fencing of trading assets, though different in detail, represents an endorsement of the ICB’s approach. He argued that, given reasonable flexibility, Liikanen’s recommendations should also be compatible with what the UK plans to do. The Bank of England’s Haldane suggested that investors should welcome this split as it would spur prudent valuations that would help in removing residual uncertainty about banks’ legacy portfolios. Private investors might to return to buying bank shares as they might otherwise be fearful of paying for yesterday’s mistakes. That would boost bank valuations and support bank lending.

EBA chair Enria said that with this recapitalisation exercise and a number of other EU-driven remedial actions, more than €200 billion had been injected into the European banking system. Additional efforts by banks are also required to meet the full CRD IV/CRR implementation, as shown by the recently published EBA Basel III monitoring report. This new EBA Recommendation will require banks to maintain an absolute amount of CT1 capital corresponding to the level of 9 per cent Core Tier One ratio at the end of June 2012.

At the European Parliament, Enria argued that the ECB needs to have responsibility for fully-fledged prudential supervisory tasks and powers, with a remit on all banks chartered in the euro area. The operational conduct of day-to-day supervisory oversight could be to some extent delegated back to national authorities, especially for banks active predominantly in local markets. However, he is very worried that the solution could simply raise the required votes for approving a proposal, coming very close to a unanimity principle. ECON’s draft banking supervision proposal would give national supervisors a greater role than do Commission proposals, while at the same time retaining the ECB's power to decide to supervise any bank directly. 

The Giegold draft ECON report deals with the role of the EBA in the supervisory structure and proposes that an EU-wide supervisory system, bringing together eurozone and non-eurozone countries, should have the EBA at the helm. The draft places the EBA in charge of coordinating the EU supervisory structure, with the ECB supervisor and non-eurozone supervisors implementing the single supervisory rulebook to be drafted by EBA. This solution, the draft argues, would be the best way to give eurozone and non-eurozone countries an equal say in the methods chosen to supervise their banks.

The BCBS-IOSCO consultation on "Margin requirements for non-centrally cleared derivatives" has triggered a flurry of reactions, and investor groups such as ICMA’s are concerned that existing derivative instruments should not be retroactively hit with Initial Margin (IM) so a grandfathering clause is absolutely necessary. The Association Française de la Gestion financière is concerned that the proposal for payment of IM will be extremely complex, and difficult and costly to implement – especially for UCITS and AIF. The requirement for IM between financial firms and systemically important non-financial firms is strongly opposed by ISDA and it backed up its fears with some startling numerical analysis of collateral requirements: estimated to be about US$16 trillion to US$30 trillion for IM only. Note: the capital of the largest 16 banks in the global banking system is around $1 trillion.

Solvency II: The WSJ reported that EIOPA chair Bernadino said that the currently envisaged starting date of January 1 2014 was 'completely out of reach', suggesting it would now be either 2015 or 2016. “At the end of the day, we'll probably go to 2016, but it is still to be seen." Ernst & Young reported that just under half of European insurers would be ready for the Solvency II regulatory framework by January 2014, but almost 90 per cent of respondents are on track to meet a 1 January 2015 deadline. However, and at long last, Markt DG Faull has asked EIOPA to examine whether, under current economic conditions,the Solvency II capital requirements regime needs any adjustment or reduction, without jeopardising the prudential nature of the regime. (European insurers are a potentially powerful financing channel for long-term investment – with assets of more than 50 per cent of European GDP.)

IFRS: The SEC Staff Report analysed incorporating IFRSs into the US reporting regime and the challenges for a US transition to IFRSs.  IFRS Trustees chair Michel Prada commented: “While acknowledging the challenges, the analysis conducted by the IFRS Foundation staff shows that there are no insurmountable obstacles for adoption of IFRSs by the United States, and that the US is well placed to achieve a successful transition to IFRSs, thus completing the objective repeatedly confirmed by the G20 leaders."

Graham Bishop

© Graham Bishop