03 December 2012

グラハム・ビショップの欧州金融サービス・マンスリー2012年11月号

The self-imposed year-end deadline for agreeing on Banking Union (BU) is looming ever-closer but political disagreements remain deep, quite apart from many crucial technical matters to be resolved. Germany and France argue that agreement is close, but non-euro area Sweden continues to argue that a Treaty change would be necessary for the ECB to supervise - in an acceptable way - the banks in ‘out’ states. In any case, Bundesbank President Weidmann argued that BU is not the key to solving the current crisis. Instead, it is “a future-oriented concept whose purpose should be to help prevent future risks”.

Moreover, he pointed out that: “To communitise these legacy burdens through a banking union would run counter to the purpose the banking union was established for: it would then constitute a financial transfer”. A proposal by the German Council of Economic Experts tackled this issue: “Qualification for a European banking licence involves a complete re-assessment of the value of banks’ assets – including claims vis-à-vis the government – through external experts”. Such a banking union could be complete in 2019 – meshing with deadlines for full Basel III implementation – but a long way from the speedy suggestions of current political leaders. In a different vein, think tank Bruegel suggested that this is not the right moment to come up with completely new proposals. A single supervisor is urgently needed to stop national approaches to supervision that are fragmenting the euro area financial market. Their key idea is that the new structure should be provisional and include a sunset clause.

A key element of BU was originally thought to include deposit insurance. The Bank of England’s Tucker gave an update on the FSB's progress on bank resolution – including how deposit insurance fits in. He stated that the deposit insurance regime “has the potential to revolutionise retail banking”, lowering barriers to entry. And in terms of who pays for this, “it isn't government and the taxpayer but the industry itself”. In the EU, this may have been shelved finally, when ECB President Draghi said: “Financial union does not have to imply the pooling of deposit guarantee schemes. Organising and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness.”

The proposed "bail-in" mechanism is another part of BU, and Insurance Europe called on the European Commission to limit its potential use. European insurance companies have approximately €7,500 billion of assets under management, of which approximately 55 per cent is invested in both fixed income and loan assets. An insurer’s investment strategy is generally driven by the need for both predictable and stable long-term cash flows to meet insurance liabilities, so insurers are an important source of long-term funding for the banking sector. The establishment of a bail-in regime could have a significant impact on investment decisions and thus for the banking sector’s ability to fund itself successfully.

The reactions to the Liikanen Group proposals continue to flow in. ICMA argued that separating securities trading activity, possibly isolating it from primary market activity, will have potentially significant adverse impacts on the international capital market; and that focusing on how to design bail-in debt is not the best way to develop this important feature of recovery and resolution regimes. EBF contends that a compelling case for mandatory separation of proprietary trading activities and other significant trading activities has not been made in the report. The EBF therefore recommends that any impediments to resolvability are addressed along the lines of the better balanced provisions of the European Commission’s proposal for a Bank Recovery and Resolution Directive (BRRD). ESBG appreciates the effort made to target the more risky institutions and activities, but still doubts how the thresholds system for ring-fencing trading activities would be applied. It seems to be very difficult to assess which activities would fall under the threshold and which would fall outside. Finance Watch explained why the public interest arguments claimed by the banking industry in support of the so-called “universal banking model” are substantially incorrect. 

Is Basel III the last word in global banking standards? The ICFR’s Andrews reviewed the flow of comments and said the key issues to watch will be: the relative priority of the leverage ratio and risk‐weighted capital; amendments to disclosure requirements; the evolution of the term “excessive variability” as applies to RWAs; the expansion of the role of standardised or simplified approaches to risk‐weighting; and the possible introduction of capital floors. How far can Basel III be revised before it starts being Basel 3.5, or Basel IV?

The political excitement of BU sometimes overshadows the potential effects on the economy that flow from the infrastructure. In an excellent paper, ECMI analysed three components on the new post-trade infrastructure measures: 1) the regulatory framework for and supervision of central counterparties under EMIR legislation; 2) the authorisation requirements of trade repositories; and 3) the draft CSD Regulation. As the Bundesbank’s Dombret put it: “The implementation, application and introduction of the numerous rules will demand a huge effort: CCPs have to adjust their risk management to cope with more clearing members and with accelerating volumes of derivatives to be cleared centrally.” However, CICF – a group of European trade associations – stressed that the importance of collateral has grown in recent years, particularly since mid-2007. The demand for high-quality collateral would increase following the implementation of the Basel liquidity requirements and the shift of standardised OTC derivatives to central clearing. "Too much haste in implementing multiple regulatory changes impacting collateral will lead to adverse consequences, which are already visible through the fear of a collateral squeeze."

EIOPA Chair Bernardino has now gone public on the start date for Solvency II: “A credible timetable will probably point to an implementation date not earlier than 2016”. He also remarked: “If insurance groups heavily develop their business into non-traditional or non-insurance activities, then they should expect to be treated in relation to those businesses as if they were banks”. His fear is of insurers increasing systemic risk and effectively becoming “shadow banks” by expanding their involvement in “maturity transformation” and the provision of leverage. Insurance Europe said the European insurance industry supports the goals of the Solvency II regulatory regime but vital issues still need to be resolved: a matching adjustment to address artificial volatility; a counter-cyclical premium to cope with distressed market conditions and avoid counter-productive and pro-cyclical behaviour; and an extrapolation methodology to extend the interest curve beyond the point at which the market is deep and liquid, without creating volatility in the valuation of long-term liabilities.

IFAC welcomed the recent IMF paper, 'Fiscal Transparency, Accountability and Risk', as it highlights the seriousness and extent of the current inadequacies in governments' fiscal reporting and accountability, and underscores the immense risks associated with the shortcomings. These include: (i) complying with international standards for public sector financial reporting, including reporting all assets and liabilities by, for example, using IPSASs; and (ii) including all entities that have fiscal implications for governments (including central banks, public entities and corporations outside the general governments) in fiscal forecasting, budgeting and financial reporting.

ESMA Chair Maijoor expressed his strong support for IFRS’s contribution to financial stability, so his disappointment with the SEC’s “non-decision” on a timetable for their use in the US was palpable. Europe has patiently bent over backwards to accommodate US concerns, but he now feels it will never be enough. However, ACCA is more optimistic having surveyed US investors: “Attitudes to IFRS appear to be changing, irrespective of any action by the SEC. The more familiar investors are with IFRS, the more confidence they have in the standards, which echoes the experience in countries that have already adopted IFRS."

Graham Bishop

© Graham Bishop