Moreover, the new co-legislator powers of the Parliament were used to prevent the Council from watering down the proposals to the point that a citizen could easily ask what changes had been made that corresponded to the magnitude of the problem that had been conclusively demonstrated. On the two counts of speed and constitutional flexibility, the EU can be pleased with the outcome. But we will have to await the judgment of future historians to know if the real test – will the arrangements work in a crisis – will be passed.
So the new “watchdogs” will be operational from 1 January, 2011 – with more or less the powers proposed by the DLG, at Parliament’s insistence. Moreover, the triennial review means that the development process may not yet be finished and Parliament succeeded in enhancing its influence in several key areas. The issues of levies on banks and a possible financial transaction tax seem to remain live topics, despite the failure of the G20 to agree on these.
“Basel” also pronounced on new capital adequacy standards and a leverage ratio.
The new capital standards raised the requirement for common equity from 2% to 7% but in practice the increase is even tougher as the definitions were also adjusted in some respects. An additional counter-cyclical buffer is planned. Basel gave a firm response to the fears that these new standards might damage the recovery by producing studies that suggested the consequences would be minimal. Curiously, the Committee then decided to phase the new standards in over a very long period and give itself ample time to analyse developments on both liquidity and the leverage ratio before hard-wiring them into the system. The FSA’s Lord Turner commented in typically robust form that "ill-designed policy is a more powerful force for harm than individual greed and error". If Basel I created incentives for banks to shift assets into off-balance sheet vehicles, then a tripling of the capital requirement may accentuate that trend – unless the leverage ratio really does operate to restrain such activity.
Another key plank of the G20 scheme to de-risk the financial system was announced by the Commission with its proposed Regulation on OTC Derivatives and Market Infrastructures.
Alongside its demands for greater transparency and improved clearing, the Commission acceded to requests to exempt from margining non-financial firms that are genuinely hedging their basic trade. But the ECB demanded that any loopholes that may undermine the effective implementation of a general clearing obligation should be avoided. The Commission also published its proposal on short selling and Credit Default Swaps. Its main objectives are to create a harmonised framework for coordinated action at European level and also make it easier for regulators to detect risk in sovereign debt markets.
The Commission held a hearing on the MiFID review. High frequency trading will be carefully monitored now, given the rapid development of technology that financial markets have experienced. This should be tackled in the MiFID review in order to avoid flash crashes such as the one that happened in the NY stock exchange on 6 May 2010.
France plans to make a greater regulation of commodities markets a cornerstone of its G20 Presidency next year. Commissioner Barnier has said that speculation on this market clearly exists and it should be urgently tackled in order to avoid distortions in commodities prices. Agriculture Commissioner Cioloş highlighted that future commodities markets must serve the real economy by helping the agriculture sector to mitigate risks such as the impact of climate change. He strongly advocated a more transparent and supervised commodities market. The updating of the Market Abuse Directive will also tackle many aspects of financial markets and improve the oversight of commodities markets.
However, another critical plank in the whole reform process is the new accounting standards relating to financial instruments.
The goal remains a single global set of “high quality” standards but FASB in the US seems to be re-inforcing its determination to focus on the “fair value” of such assets. So EU observers such as the EBF and the UK’s ICAEW have taken to commenting of FASB proposals. ICAEW believes that the IASB’s new ‘mixed measurement’ model, which results in financial instruments being stated at either amortised cost or fair value in the primary financial statements provides more relevant and understandable information to users of financial statements. ICAEW argues that the model provides a much better platform for convergence between the two accounting standards setters’ rulebooks.
The EBF has concerns about the approach adopted by the FASB because there is no reflection of business practices Financial instruments accounting should be based on a mixed measurement model and the EBF supports the classification criteria that differentiate between financial instruments measured at amortized cost and those measured at fair value, based on the business model used by the entity. Amortized cost should be required for instruments held for the collection/payment of contractual cash flows which should be complemented with an impairment model allowing earlier recognition of credit losses compared to current incurred loss model.
Graham Bishop
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