04 February 2013

グラハム・ビショップの欧州金融サービス・マンスリー2013年1月号

The incoming Irish Presidency set out its plans for the next six months, including (i) Enhanced economic governance and policy coordination – enacting the two-pack and managing the Third European Semester, and (ii) Taxation: financial transaction tax (FTT), common consolidated corporate tax base and the savings directive. ECOFIN approved the FTT under the enhanced co-operation procedure for 11 states to proceed – with unanimity amongst them required – with a tax whose scope and objective is based on the Commission’s 2011 proposal. The European Parliament in plenary voted for a “careful pooling of sovereign debt” and their options include the possibility of ‘Bishop Bills’.

The Single Supervisory Mechanism (SSM) – the first pillar of Banking Union (BU) - is under intense discussion and ECB Vice President Constâncio laid out some key requirements for the trialogue with the European Parliament, while confirming his belief in the legal robustness of the Council proposal. A second element of BU is Single Resolution Mechanism with “an organisational set-up similar to the SSM”. Resolution is about bailing-in shareholders and creditors - based on banking sector contributions, though perhaps involving public money temporarily. An immediate task of the SSM will be a comprehensive review of the banks under direct supervision from ECB - including an asset quality review to identify potential legacy problems as these losses will be borne first by the banks’ shareholders and/or partly by the countries where they are domiciled.

The Liikanen Report by the HLEG continues to reverberateand Liikanen himself specified “separation is a way of preventing banks with insured deposits from engaging in activities whose risks are potentially high and difficult to quantify precisely, and which are not essential to deposit banking”. The Eurosystem also welcomed “that the proposals aim at safeguarding the diversity of the EU banking sector and considers them to be compatible with the prevailing universal banking model in Europe”. However, the US and UK have already made proposals so the Eurosystem argued for consistency to avoid regulatory arbitrage and ensure a level playing field for financial institutions that are active across jurisdictions.

During the month, the French government came under domestic pressure to toughen up its banking reform bill which falls short of EU-wide proposals to ring fence banks' trading activities. The German business and banking sectors advocated maintaining the universal banking system in Germany and the EU, but the FT reports a draft German Government Bill would require banks to set up a separate unit for any large proprietary trading activities. It now seems that Commissioner Barnier is signalling a retreat, as Liikanen’s central recommendation – that banks’ trading activities should be hived off into ring fenced, separately capitalised units – risked undermining fragile European growth outlook. “I don’t want to penalise the work of banks when they work for the benefit of the economy and industry”, Mr Barnier said.

The Liikanen proposals are not the final word for the banking sector, as the EBA adopted a formal Recommendation to ensure that major EU cross-border banks develop group recovery plans by the end of 2013. It intends to fill the interim period before a comprehensive legislative framework for the recovery and resolution of credit institutions is implemented. ‘Shadow banking’ may have dropped from the headlines, but EFAMA supported the FSB’s objectives of closing any regulatory gaps and adopting a targeted methodology by narrowing down its focus to the portion of the shadow banking system that can be defined as a system of credit intermediation that involves entities and activities outside the regular banking system.

For the securities industry, the European Parliament is planning to reject some ESMA proposals for implementing parts of EMIR but did vote through new rules to allow CRAs to issue unsolicited sovereign debt ratings only on set dates, and enable private investors to sue them for negligence.Commissioner Barnierreiterated that the vote was another important step in the demanding agenda to strengthen financial regulation and in response to the financial crisis, as the new rules will contribute to increased competition in the rating industry dominated by a few market players. AFME fully supported the MiFID II proposal to extend public price transparency requirements to the secondary market for bonds and structured finance products.

Insurance regulation may be moving forward again as EIOPA launched a technical assessment of the long-term guarantee package agreed by the Trialogue partiesin the Omnibus II Directive negotiations. The assessment will focus on the following key features (individually and in combination): adapted relevant risk-free interest rate term structure (“Counter-cyclical Premium”); extrapolation; matching adjustment (“Classic” and “Extended”); transitional measures; and extension of the “Recovery Period”. Insurance Europe welcomed this technical assessment to find the most appropriate treatment of long-term guarantees under the forthcoming Solvency II regulations. “The decision to carry out the assessment shows that legislators recognise that changes are needed to ensure that Solvency II measures the real risks in insurers’ long-term business”, said Olav Jones of Insurance Europe.

A perverse result of Basel III and Solvency II is that bank funding is threatened. Basel III’s liquidity rules mean European banks may need to raise as much as €2.3 trillion in long-term funding – according to a 2010 McKinsey study. “At a high level they want banks to have more capital and you know who owns the banks -- it’s us”, Prudential CEO Thiam told Bloomberg.  “Solvency II, which is our own solvency regime, says that we cannot invest in banks. I’ve made the point here to many regulators: How does that work?”

The EDHEC-Risk Institute published a study on pension liabilities in EU countries. Due to the variety of national systems, getting a clear view of pension liabilities is not straightforward. The recent 2012 Ageing Report (European Commission, 2012) goes a long way in providing comparable figures and projections of public and other pension expenditures. The present value of pension liabilities is very sensitive to the discount rate chosen. At a 5% discount rate, the accrued-to-date liabilities exceed 100 per cent of 2010 GDP in 18 out of 27  countries; of above 200 per cent in eight countries;  and up to 483 per cent for Belgium. At a 4% rate, 12 countries are above 200 per cent and seven countries above 400 per cent. At a 3% rate, 11 countries are above 400 per cent of GDP, six countries are above 800 per cent.

Turning to corporate governance issues, IASB Chairman Hoogervorst focused on the search for consistency in financial reporting at a Centre for Financial Analysis and Reporting Research (CeFARR) briefing. The main conclusion of a recent CeFARR report is that there is considerable variation in compliance with some impairment disclosure requirements across countries in Europe, suggesting uneven application of IFRS. The IASB has tried to head off a UK backlash, telling politicians that it had not encouraged banks and other companies to be more aggressive in their accounting. Some British critics – such as PIRC, the corporate governance adviser – claim IFRS has made accounting less prudent by undermining or even jettisoning the principle that financial statements need to be “true and fair”. The broader critique of both IFRS and US accounting rules is that they require banks to provide for loan losses only when they have demonstrably occurred, allegedly creating artificially low provisions in good years and heavy losses at times of stress.

According to draft plans seen by the FT, Commissioner Barnier is preparing to field views on potentially revising the “one-share one-vote” principle applied by the bulk of EU companies.  Other options include consideration of whether “particular types of long-term investments merit preferential capital requirements”, specifically for insurance groups. The paper calls for debate on the favourable tax treatment given to debt over equity, and whether “the use of fair value [accounting] has led to short-termism in investor behaviour”. 

Graham Bishop

© Graham Bishop