06 July 2012

グラハム・ビショップの金融サービス・マンスリー2012年6月号

The June European Council will be seen as a landmark – not because quick fixes were agreed but precisely because it was decided to ask President van Rompuy to produce a report by December for “a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union”. Finally, the Heads of Government have realised that they cannot go on with a series of short-term crisis management measures. Instead, they have to think through what sort of political entity will repay the 10-year government bonds being issued today. IF the answer steadily turns out to be a much sounder and more competitive economic entity than today, then palliatives will help the euro area struggle through the current problems.

There is an interesting parallel with the Delors Report of 1988 that was asked to come up with a possible plan if there were a wish to adopt a single currency. The report was simply adopted without any great public debate about whether this was a desirable goal. This time, the goal is already specified so there can be no debate about the end-point – only the chances of achieving it. Van Rompuy laid down the framework when he introduced it: “The report proposes to move, over the next decade, towards a stronger EMU architecture, based on integrated frameworks for the financial sector, for budgetary matters and for economic policy. All these elements should be buttressed by strengthened democratic legitimacy and accountability.”

The van Rompuy report stated that “Several options for partial common debt issuance have been proposed, such as the pooling of some short-term funding instruments on a limited and conditional basis”. 

Graham Bishop submitted a simple plan to achieve this: Set up a temporary euro Treasury Bill Fund with pro rata liability - with aspects of the EFSF’s Over-Guarantee system and with the ESM effectively functioning as the first loss-buffer. It would come into operation only after the TSCG and "two pack" are in force, so ensuring the economic governance component of the political union is functioning. Given the existing €2.2 trillion of euro area pro rata guaranteed obligations (deposits at the ECB, the EFSF and the ESM), the theoretical cap on the Fund would be about the same. The Fund should be a direct substitute for deposits at the ECB, and drawings on the ESM would be used first to pay off obligations to the Treasury Bill Fund. So the euro area’s genuine risk of loss would not increase as a result of the Fund, as any losses would crystallise within the ESM. In practice, the risk of loss should even reduce as the ECB’s exposure to banks is replaced with the Fund’s exposure to sovereigns.

The Heads of Government also started along the path to a “banking union” – without specifying the crucial detail. Graham Bishop also proposed a plan for a banking union – to correspond to the Treasury Bill fund: Create the status of a 'European Bank’ that must – but only - include all banks capable of spreading cross-border contagion within the euro area. The prudential supervision of these banks would be undertaken by the ECB. Correspondingly, the ECB would be able to request the ESM to adopt the power to backstop a dedicated, pre-funded Deposit Guarantee Scheme and Resolution Fund for these 'European Banks' until a sufficient-sized fund had been accumulated by them. Such banks would be subject to special regulation limiting 'large exposures' to national public debt, opening the way to holding liquid 'European debt' like the T-Bill Fund. 

The general concept of a banking union received powerful support from President Barroso and Chancellor Merkel and they argued that a political vision for the future of Europe is needed as the monetary union should be supported by the creation of an economic union. DG ECFIN pointed out that banking union is a political vision for more EU integration and not a new legal instrument to be drafted. The political will can build on recent major steps to strengthen the regulation of the banking sector. Further measures are already on the agenda: Proposal on resolution tools for banks in crisis; What instruments will the European Stability Mechanism (ESM) offer for the banking sector. But other ideas are feeding reflections for the future: an integrated system for the supervision of cross-border banks; a single deposit guarantee scheme; an EU resolution fund. The proposal on resolution tools for banks in crisis may be a first step in this direction.

Commentators began to weigh in quickly, and the Bundesbank’s Dombret said that "The recent proposals of a so-called banking union appear to be premature", as he stressed that a pan-EMU deposit-guarantee scheme and a debt resolution fund would require "a genuine, democratically legitimated fiscal union" and a new treaty. The first condition is the rigorous implementation of budgetary consolidation and growth-enhancing structural reforms in the Member States of EMU. Bruegel’s Bijlsma argued that a banking union is no panacea, despite recognising that the claim that the eurozone needs a banking union is by now almost universal. But will it be sufficient; in other words, will a banking union create a stable monetary union? There are at least three reasons to worry, he says. First, a banking union solves only part of the pernicious feedback loop between countries and banks when these keep a large amount of their sovereign’s debt on their balance sheets... Second, in a monetary union with national banking systems, the funding of country deficits due to public or private spending will largely occur through loans provided by banks in a surplus country to banks in a deficit country.

Across the road in Brussels, CEPS’s Lannoo exhorted the EU not to lose further precious time in creating a fully-functional bank union. In his opinion, this would entail three main steps: creating a single supervisory authority, a common deposit protection, and a harmonised bank resolution and liquidation system. However, his colleagues Carmassi, Di Noia and Micossi presented a rationale and detailed outline for the creation of a banking union in Europe.  But they did note that the debate on this topic seems mired in confusion – especially about the features and tasks of deposit insurance at the eurozone or EU level in combating contagion and restoring financial stability. It also seems at times to overlook the fact that many constituent elements of banking union are already present in the legislation in force or tabled for approval and, more importantly, that much of what is needed may be feasible with ordinary legislative procedures.

The discussions of banking union were greeted with mixed feeling in the UK, and Deputy PM Clegg said “that the protection of the single currency must not translate into protectionism. In the lead-up to the summit, we must be wary of caricatures: that a “new thing” called banking union now threatens the UK, and that our government stands up for City exceptionalism and deregulation.” Nonetheless, the new term “Brexit” (British departure from the EU) was soon circulating.

But the Heads of Government were obliged to make it quite clear that the essential precondition for progress to sharing financial responsibility – whether for banks or other governments - is collective ability to influence economic policy. June witnessed two more significant steps along that road: (i) ECOFIN approved draft recommendations to all Member States on their economic policies, as well as for the eurozone as a whole - under this year's European Semester - and (ii) the European Parliament adopted in Plenary its position on the "two pack" for negotiations with Council.

Separately, the European Banking Federation (EBF) welcomed the Bank Recovery and Resolution Directive proposed by the European Commission, as it minimises the systemic and fiscal consequences of bank failures, and eliminates moral hazard by making bank failures an orderly process. EBF Chief Executive, Guido Ravoet, declared: “Where recovery tools fail to save a bank, resolution tools should ensure the continuity of economically relevant functions of a bank. For example, in order to limit the knock-on effect to the wider financial system and its customers, deposits and payments should not be interrupted.”

Who is a “US person”? Is this the next round of a Trans-Atlantic trade war? Commissioner Barnier said: "The danger is that many of the requirements would apply to companies in the EU and to trades between the EU and US clients. American rules would take primacy over those in Europe… We will insist that the interests of the City of London and other European financial centres are respected". This is vital in the regulation of derivatives and was underlined as ESMA consulted on proposed implementing measures for the application of the clearing obligation for risk mitigation techniques, exemptions for non-financial counterparties and intra-group transactions, requirements for CCPs and reporting and disclosure obligations for trade repositories.

The shadow banking Green Paper continues to draw further reactions: The Luxembourg Fund Managers (ALFI) gave a general welcome but the inspection of the detail throws up problems. As an example, European funds – especially in the form of UCITS – have a globally recognised and respected brand; to label any UCITS as “shadow banks” is inappropriate and potentially damaging to the brand, both within and outside Europe. ICMA argues that the term ‘shadow banking’ contains pejorative connotations. In fact, shadow banking is an alternative term for market finance. It is market‐based because it decomposes the process of credit intermediation into an articulated sequence or chain of discrete operations typically performed by separate specialist non‐bank entities which interact across the wholesale financial market. ICMA’s assets management council urged the European Commission to use an alternative label, for instance ‘market finance’.

The long-awaited revision of the Insurance Mediation Directive (IMD) finally appeared, and Commissioner Barnier said the new regulatory framework would allow insurers and insurance intermediaries to remain a pole of stability in the financial markets. This proposal takes into account the fact that most operators in the sector of insurance mediation are SMEs, consisting of about 1 million people throughout the EU. The Commissioner remains "hopeful" of political agreement on Solvency II but at least two Member States are calling for asignificant delay – perhaps of a year – given the key difficulty in the Omnibus II Directive. CEPS explained that upon a declaration by EIOPA that distressed market conditions exist, an additional wedge is to be added to the risk-free term structure to value all insurance liabilities subject to fair market valuation. But CEPS argued that the proposed CCP adjustment defines a valuation concept with no economic foundations, and thus one that is easily manipulated.

EIOPA launched a consultation on the Quantitative Impact Study to help IORPs to perform the necessary calculations if the Holistic Balance Sheet happens for IORPS. But the deadline is astonishingly close - 31 July – leading many commentators to conclude that the delay in the IORPS proposal to mid-2013 might well not be the last delay. Matti Leppälä, secretary general of the European Federation of Retirement Provision (EFRP), said he welcomed the revised timeline and argued in favour of an in-depth analysis of the potential quantitative impact the IORP Directive could have on pension funds.

IASB Chairman Hans Hoogervorst talked about the imprecise world of accounting, and stressed that IFRSs as global standards have already contributed a great deal to transparency and international comparability. He illustrated his point by comparing private sector accounting with the "anarchy" of public sector accounting. Although IPSASs are based on IFRSs, they are used only haphazardly. Around the world, governments give very incomplete information about the huge, unfunded social security liabilities they have incurred. In a particularly powerful statement he said that “Many executives in the private sector would end up in jail if they reported like Ministers of Finance".

Ian Ball, IFAC CEO, pointed out that most countries around the world still use what is termed “cash-based” accounting for public finances. Even for the UK, adding in public sector pension liabilities adds another 90 per cent of GDP to debt. Yet Britain is in a relatively secure position compared to other eurozone countries. As the Wall Street Journal reports, Spain, Greece and Portugal’s liabilities are 204 per cent, 231 per cent and 298 per cent respectively. And even these are not the worst countries: Germany and France top the table, with 330 per cent and 360 per cent of GDP respectively.

FEE commented on Eurostat's public consultation on the suitability of the IPSAS for EU Member States as it supports high quality accounting standards in the public, not-for-profit and the private sector which are based on robust and clearly articulated principles. FEE has also been long supportive of the work of the IPSASB. The sovereign debt crisis and the related government fiscal crisis emphasised the need for better transparency, accountability, adequate financial management, quality financial reporting and auditing in the public sector. There is a genuine need for reliable and relevant financial reporting to protect the interest of the public and foster stewardship in the public sector.

Graham Bishop

© Graham Bishop