03 August 2012

金融サービス・マンスリー7月号 ：6月末の欧州理事会の反響が引き続き注目の的となった7月

The reverberations from the end-June European Council meetings continued to dominate attention.

• The Euro Area Summit stated "We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area"; and “to break the vicious circle between banks and sovereigns, the Commission will present proposals for a single supervisory mechanism soon”; and “When an effective single supervisory mechanism is established … for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly..” So direct bank re-capitalisation is in a strict sequence after `banking union’ is up and running, but may be only a part of `what is necessary’;
• ECOFIN issued country-specific recommendations to all 27 Member States on the economic policies set out in their national reform programmes, and opinions on the fiscal policies presented in their stability and convergence programmes. As examples, Italy has accepted six points of recommended policy actions that are profound changes to economic management, and Spain has accepted eight equally profound recommendations. If either state were to request an EFSF/ESM `programme’, then these are already agreed as the necessary policy actions. The only extra dimension would be the degree of monitoring and surveillance to ensure the plans remain on track;
• The European Council invited its President “to develop, in close collaboration… a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union. An interim report will be presented in October 2012 and a final report before the end of the year.” Presumably, the report "Towards a Genuine Economic and Monetary Union" will be the basis for this work. It sets out "four essential building blocks" for the future EMU: an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework and strengthened democratic legitimacy and accountability; and 
• ECB President Draghi spoke in London using the well-known phrase about “doing whatever it takes” but did not deliver any specific and immediate policy changes after the early August ECB Council meeting. However, he was explicit on one point “I have said at least twice – at a press conference, and on other occasions – that the current design of the ESM does not allow it to be recognised as a suitable counterparty. And we have a legal opinion of the ECB on this, which was issued way back in March 2011.” So that should have finally spiked the bazooka of an ESM banking licence and unlimited ECB loans to it so that Article 123 of the TFEU (no monetary financing of governments) can be breached wholesale.

(That seems to raise the chances that #BishopBills will be seen more favourably.)

As the full magnitude of the LIBOR scandal unfolds, the probity of the entire financial system is coming under examination so the Commission proposal on legislation to improve consumer protection in financial services was well timed. The package includes a proposal for a regulation on key information documents for packaged retail investment products (PRIPs), a revision of the Insurance Mediation Directive (IMD), and a proposal to boost protection for those who buy investment funds (UCITS). Commissioner Barnier said: "In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart…” A string of professional bodies rushed to endorse the thrust of the proposal: EBF, CFA Institute, EuroFinuse, FECIF, EFAMA and AILO amongst others.

The European Commission also moved quickly to propose EU-wide rules to tackle the LIBOR type of market abuse and close any regulatory loopholes. It addressed this market manipulation by adopting amendments to the proposals for a Regulation and a Directive on insider dealing and market manipulation, including criminal sanctions. The amendments will clearly prohibit the manipulation of benchmarks, including LIBOR and EURIBOR, and make such manipulation a criminal offence. Vice-President Viviane Reding, the EU's Justice Commissioner, said: "Public confidence has taken a nosedive with the latest scandals about serious manipulations of lending rates by banks". ECON’s Sharon Bowles said "Manipulation of Libor and other similar benchmarks is a seismic event in financial markets, which affects the pricing of many other financial instruments". FSA Chair Lord Turner identified some drivers of declining trust in the banking system and suggested better, more intense and more robust conduct supervision and enforcement, but action by the leadership of banks to improve culture and values is vital.  

Following the European Council commitments, Banking Union has become a very hot topic and Commissioner Barnier asked “We want to break this link between States and their banks. With the future banking union, the situation will be different. There will be one European Supervisor to deal with ailing banks and financial crises. How are we going to build this Banking Union?” He answered his own question thus: "stepping up the democratic support and control of the EU. We need an integrated Financial Union with enhanced democratic control.”

The FT reported that Andrea Enria, head of the European Banking Authority, sees two key routes to a workable banking union supervisory structure, but both would give more power to the ECB. Part of his focus now is likely to shift inwards, as European policy-makers debate how precisely to police a new banking union for the eurozone. “We have seen a lot of segmentation in the market, a lot of retrenchment to national markets”, he says. “The cross-border money markets and interbank market disappeared. The slight signs of life we saw were within national markets. I don’t think you can maintain a single currency area with a market which is completely segmented. The need to bring the safety mechanism to a European level is very clear. And in doing that you need to obviously bring the controls to a European level.”

Somewhat surprisingly, UK Treasury Minister Mark Hoban welcomed the decisions taken by the Eurogroup and the European Council to establish a banking union, and said that the crisis had shown why a banking union is a necessary part of monetary and fiscal union. The European Central Bank is to play a role, but can it maintain its independence? ECB President Draghi, aware of the potential for embarrassment, warned that the latest major project in the eurozone could not be allowed to pose any "threat to the reputation" of his ECB.

VoxEU reported a manifesto by more than 100 economists in Germany, Austria and Switzerland: The financial crisis has exposed a fatal flaw in the design of European monetary union which can be removed only by decisive policy action. Rating agency Fitch said the plan to give the European Central Bank a role in supervising eurozone banks could help reinforce financial stability in the sector. CEPS argued for a eurozone as the home country of banks, whilst Bruegel/Vallée argued that a banking union that pools contingent banking sector related liabilities would, in fact, force Europeans to launch a debate on the shape and form of a fiscal union and the pooling of actual and future sovereign liabilities. Daniel Gros observed that while putting the ECB in charge of banking supervision solves one problem, it creates another: can national authorities still be held responsible for saving banks that they no longer supervise?

Clearly, this is a debate that is just getting underway and the results will re-shape the financial face of Europe – and probably the political face as well. All participants in EU financial markets will have to pay very careful attention to these forces – including ones from the drive to democracy.

Graham Bishop

© Graham Bishop