22 August 2013

WSJ/Steinhauser: Pivotal dates are ahead for European financial reform

This autumn will make or break the EU's efforts to fix its financial system. It's a final chance to decide on post-crisis laws and strategy before EU institutions turn their attention to the 2014 elections.

The European Commission, the bloc's executive arm, will rush out a host of financial-markets proposals, some of which have been in the works for several years. Meanwhile EU Member States and the European Parliament will butt heads over new banking laws.

First out of the gate, on September 4, is new regulation for money-market funds. The regulation is part of a broader effort to pull credit activities by non-banks out of the proverbial shadows. These funds are popular with companies and retail investors looking for an alternative that is more profitable than bank deposits but that still allows them to withdraw money at short notice and without restrictions.

Two weeks after this regulatory proposal, the Commission will present new oversight rules for setting and using benchmarks. The proposals follow investigations into the London interbank offered rate and oil-pricing (to name but a few benchmarks), but have already drawn pushback from the UK.

Long-awaited proposals on how to deal with big banks that combine retail and investment banking are expected in mid-October, but they are still very much in flux, according to EU officials. Here, the best the Commission hopes for is a "first reading" in Parliament and among finance ministers, which would carry the bills into the next parliamentary term.

The "banking union" Europe hopes to construct is missing other key parts. EU lawmakers and governments also still have to agree on bank restructuring and resolution rules—which the new authority would then apply—and restart discussions on compensating insured depositors.

A first round of talks on depositor insurance collapsed more than a year ago over the size of national deposit-guarantee funds. Similar issues are expected when the cost of bank resolution gets figured in.

But the decisions that may have the most immediate impact on Europe's financial system won't be taken in Brussels, but in London and Frankfurt. The European Central Bank and the European Banking Authority have to set the terms for new stress tests for bank, scheduled for next year, which some observers hope will finally force lenders to recognise hidden losses.

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