Bank stress tests and the clash over future supervisory powers were the major themes of July. But both are different aspects of the fallout from the financial crisis and the ensuing economic downturn. Commissioner Rehn argued to the Parliament that the stress tests will help reduce uncertainty and restore confidence. But they are inextricably linked to a resolution of the economic governance issues as the solvency of governments is at the heart of market concerns about the banks that they underwrite – in some cases, literally. The Commission has now adopted a concrete toolbox to reinforce economic governance by substantiating its earlier initiatives on restoring competitiveness and setting out a roadmap for their implementation.
The EP deferred the final vote on the "supervisory package" legislative resolution -with an overwhelming majority, so it sent a strong message to EU Member States that the only option for effective financial supervision is one based on a thorough reform of the current system, with the establishment of European authorities capable of taking effective action. The deferral left the door open for a few more weeks for an agreement to be reached at first reading with the Council after the summer break - but gave the negotiators the backing of the full Parliament.
Parliament’s amendments would enable the ESAs to issue decisions directly to a financial institution such as a bank, where the national supervisor has not been able to change some of its practices that are considered unsound. They would also have the power to settle disputes between national supervisors and to supervise important cross-border financial institutions by acting through the national supervisors. Moreover, the EP would have the power to summon the addressees of the ESRB's recommendations to explain the actions they have taken to deal with the ESRB's comments. ECOFIN Council set out its position with a view to continuing negotiations with the Parliament and baldly stated that “There is now a large degree of convergence between the two institutions”.
CEBS published the results of the EU-wide stress-testing exercise that included a sample of 91 European banks, representing 65% of the European market in terms of total assets, in coordination with 20 national supervisory authorities. It has been conducted over a 2 year horizon, with “severe” assumptions. Only 7 banks failed and predictably the FSB welcomed the results, amidst a swirl of adverse articles from the commentators. Yet market prices suggest that the credibility crisis has passed its worst. In the absence of a new shock quite outside the parameters of the stress tests, it would now be extremely difficult for the EU governments to allow any of the 91 banks to fail. As the issues of public solvency were at the heart of market concerns, it also follows that the eurozone has taken another implicit step toward mutual solidarity.
Having surmounted this hurdle, bank regulators are already preparing to take the next step forward. The Group of Governors and Heads of Supervision reached broad agreement on the Basel Committee’s capital and liquidity reform package. This covered the overall design of the capital and liquidity reform package. In particular, it included the definition of capital, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standard. The Committee will finalise the regulatory buffers before the end of this year. They agreed to finalise the calibration and phase-in arrangements at their meeting in September.
The European Commission proposed a package to boost consumer protection and confidence in financial services. This will improve protection for bank account holders and retail investors. Furthermore, the Commission launched a public consultation on options to improve protection for insurance policy holders, including the possibility of setting up Insurance Guarantee Schemes in all Member States. For investors who use investment services, the Commission proposes faster compensation if an investment firm fails to return the investor's assets –with better protection against Madoff-style fraudulent misappropriations where their assets are held by a third party. However, the CEA questioned the proposals on insurance guarantee schemes. They argued that the risk of insurer insolvency in the EU is low and will become even less likely once the EU’s enhanced regulatory framework, Solvency II, comes into force at the end of 2012.
The European Commission also launched a public debate on the future of pensions - how to ensure adequate, sustainable and safe pensions and how the EU can best support the national efforts. Ageing populations in all Member States have put existing retirement systems under massive strain and the financial and economic crisis has only increased this pressure. The consultation document, a Green Paper, poses a series of questions inviting all interested parties to contribute views, opinions and ideas on confronting the pension challenge - one of the biggest facing Europe and most parts of the world today – and how the EU can contribute to the solutions.
The EP’s ECON committee published a draft report on “dark pools” that calledfor a regulatory level playing field between Multilateral Trading Facilities (MTFs), Regulated Markets (RMs) and Systematic Internalisers (SIs), as well as proposing new requirements for Broker Crossing Networks (BCNs). It also suggests an ongoing regulatory review of the algorithms used by high-frequency traders (HFTs) and covers MIFID Trading Venues, Pre-Trade Transparency Waivers, Consolidated Tape, Micro-structural issues and Scope.
However, the fallout from the EMiR proposal about OTC derivatives continues to generate much comment. Should the scope of the proposal be extended to OTC derivatives markets so that MAD would allow supervisors to act if manipulative transactions with OTC derivatives took place? Should exemptions from the general clearing obligation for non-financial undertakings on the basis of systemic risk considerations also be applicable to financial counterparties? Should European clearing houses clear any transaction in which at least one of the parties is domiciled in Europe? France’s AMF supports that idea – but then the CCPs become the focal point for even greater risks. Estimates for the value of collateral now run into the trillions so the need for robust CCPs is very clear – and probably their need to have access to central banking refinancing in emergencies.
Graham Bishop
© Graham Bishop
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