Webinar: Graham Bishop hosts a discussion of the key events of the month
The February 4 European Council conclusions were very weak as nothing concrete was agreed and the hard decisions were postponed to March. However, the President was delegated to consult with the Eurogroup members (and "interested non-euro members") on the details of "concrete ways forward", with a commitment to finalising concrete proposals to strengthen the EFSF by March.
Perhaps one hopeful sign was the call to the new EBA “to conduct ambitious stress tests and on Member States to ensure that concrete plans, compliant with EU State aid rules, are in place to deal with any bank that demonstrates vulnerabilities in the stress tests.” Meanwhile, ECOFIN asked the Permanent Representatives Committee to oversee agreement on a general approach on all six proposals at its meeting on 15 March, with a view to reaching an agreement with the European Parliament in June. The EU’s approach to instilling economic discipline was encouraged by the third review mission to Greece: the underlying fiscal and broader reforms necessary to deliver the programme’s medium-term objectives are being put in place.
Disappointingly, the ECON committee had to postpone temporarily its decision on the candidates for the ESAs chairmen on the grounds that it needed more guarantees from the EC and Member States regarding the independence of all senior executives, appropriate budgetary and human resources, and an improved personnel selection procedure. During the hearings, numerous MEPs raised doubts regarding the ability of the supervisory authorities to hit the ground running due to the lack of human and budgetary resources.
The European Parliament approved a non-legislative report by MEP Anni Podimata and backed by the ECON Committee that suggests an EU Financial Transaction Tax (FTT) could have a revenue potential of a low-rate FTT with its large tax base, of nearly €200 billion a year at EU level. Graham Mather argued that the taxation of the financial sector, through a Financial Activities Tax and/or a Financial Transaction Tax, is making significant progress up the European policy agenda as the European Commission will soon publish its long-awaited impact assessments.
The PRIPS consultation has prompted a flurry of comments: EFAMA called for greater ambition as the initiative has been split into many legislative dossiers, and the scope of the proposals has been defined narrowly. CEA focused on the complexities involved in defining the scope as there is a wide diversity in market conditions, products, competition and social and regulatory environments across the EU. ALFI strongly supports a cross-sectoral approach to the regulation of retail investment products.
The FT reports that Andrea Enria, chairman of the European Banking Authority, said the financial crisis had highlighted the weakness of consensual efforts to co-ordinate banking regulation in Europe. So they would need to use the new powers – enshrined in a “single rule book”, which is the true power. “If we start having regulatory competition again, it will be havoc.” CEPS warned that Basel III is too complex, for example, banks will now be assessed on the basis of up to seven different ratios. With the increased use of regulations in financial services and the objective to arrive at a single rulebook for the new supervisory authorities, a huge task lies ahead for the EU to come forward with a streamlined Basel III and to withstand pressures for national discretion. The ESFRC called for simplicity in regulatory requirements.
The economic impact of Basel III continues to be a source of comment: the BIS reported that each percentage point increase in the capital ratio causes a median 0.09 per cent decline in output, while the liquidity regulation has a similar impact. The OECD estimates that the medium-term impact of Basel III implementation on GDP growth is in the range of -0.05 to -0.15 percentage point per year.
The ending of the MiFID Review consultation period produced many comments – starting with complaints about the timetable of the consultation itself. Financial News reported that “UK slams European Commission over new plans for MiFID” focussing on the process as "inappropriately curtailed" and "not conducive to sound policy-making" The FT reported that a “backlash grows against MiFID reforms” over moves to impose greater transparency on parts of the equities and derivatives markets. AFME claims that the Commission must avoid rules that are not fit for purpose, have unintended consequences or produce a level of regulatory uncertainty that will impact detrimentally on the efficient and effective functioning of the European market. ICMA simply said “We have to go on working with policy-makers to improve these proposals.” FESE said that we need the same rules for the same business to improve the quality and safety of EU markets.
The European Market Infrastructure Regulation (EMIR) proposal is now well into legislative scrutiny and the ECON debate was led by Rapporteur Werner Langen (DE, EPP) who has received a high quantity of input and is proposing around 100 amendments to the proposal. In particular, he does not support the Council deletion of “OTC” because not all derivatives should be covered under EMIR, especially as the US is only dealing with OTC derivatives. Arguments for exemptions are spreading – possibly including 100% state-owned public banks and pension funds. However, Bloomberg reported that the Legal Services are questioning if the Commission will be stopped from delegating key powers to ESMA due to the 1958 Meroni judgement.
The Solvency II rules for insurers have produced some exceptional reactions. The CEO of Allianz described them as unworkable and dangerous for consumers. The CEA said that important adjustments are still needed because “ the QIS 5 process was extremely complex, lacked sufficient guidance for companies and suffered from tight time pressure, [so] great care needs to be taken when interpreting the detailed results“.
Pensions regulation is also coming back to centre stage as the EP’s plenary voted that Pension reforms should ensure sustainability and adequate income. The EFRP said that it "is particularly satisfied that the European Parliament has recognised the specificities of IORPs, bearing in mind that the risks in the insurance sector are different and that those differences should be reflected in the prudential regime." The UK’s NAPF also welcomed the EP’s caution on the Green Paper. However and in some contrast, the CEA welcomed Parliament’s support for a review of the solvency regime for pension funds, saying that “risk-based principles such as those that underlie the new Solvency II regime could be a valuable starting point,”
Accounting issues are coming back into prominence and Commissioner Barnier called for worldwide adoption of IFRSs but “the standards are less useful if they are not used by everyone.” As a step in that direction, the IASB Foundation announced its plans to open an Asia-Oceania liaison office in Tokyo. Attention is also now moving to rectify the failures of auditors to spot the impending crisis and the FRC’s Stephen Haddrill said "Action should be taken to close the expectations gap between what audit does and what users expect from financial statements". The Commission published a summary of contributions to its consultation on audit policy and almost 700 responses were received.
The IASB and FASB have come up with a solution for offsetting financial assets and financial liabilities on the statement of financial position. Netting results in the single largest quantitative difference in reported numbers in financial statements under IFRSs or US GAAP, especially prominent for derivatives held by financial institutions. IASB and FASB have also produced proposals for accounting for impairment of financial assets by moving to an expected loss model that provides a more forward-looking approach to how credit losses are accounted for.
© Graham Bishop
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February 2011 MiB.pdf
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