07 May 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4月号

Key components of the repair of the euro fell into place in April, but attention is now beginning to swing to the Eighth Parliament and next Commission as the Seventh Parliament will dissolve within 12 months. The Single Supervisory Mechanism and European Banking Authority measures were enacted – though requiring final ratifications by Parliament and Council before they come into force. Only then can the ECB Supervisory Board be created and the technical details of managing the new supervisory system filled in.

The ECB’s ‘Financial Integration’ and the Commission’s ‘Stability and Integration’ Reports were published. Some concerns surfaced. The original three-legged structure – Single Supervisory System (SSM) + Single Resolution Mechanism (SRM) + Single Deposit Guarantee System (DGS) - has already had one leg chopped off as the pan-eurozone DGS has been shelved. Germany has now suggested that the SRM may need a Treaty change to have full legal strength and the SSM mechanics are being questioned.

Little attention has been given to an aspect of the Regulations on the SSM and EBA: they have created two classes of bank in the EU - European and national. The natural consequences – immediate and medium-term - should be followed through rapidly to understand the implications for banks, the financial system and public finances. This risky, game-changing moment is now set to occur at some stage within the next year as the ECB takes over day-to-day supervision. That action gives a one-off opportunity to correct these perceptions, or actual errors.

The accounting treatment of expected losses is a well-known issue so it should be open to the ECB to announce well in advance the supervisory rules that it will follow on impairment when it conducts the Asset Quality Review (AQR) of assets that it will take under its supervision. That gives bank management an opportunity to inform shareholders – again, in advance - of the potential additional ‘special charges’ against profits that will be reported. This process would be quite distinct from a stress test as that simply measures what will happen to ‘reported’ losses under particular economic scenarios. The AQR must go to the heart of the problem: the belief that there are heavy, hidden losses that threaten the stability of some banks.

Given the transition to a single rule book in financial services across the EU and the EU legislator's willingness to have "all financial markets, products and actors covered by regulation", it is increasingly important to ensure that legislation fits together seamlessly. So ECON announced a consultation that will feed into a programme of reflection to determine future priorities for the remainder of this mandate and to inform the priorities for the incoming Eighth Parliament in 2014. The next Commission/Parliament has much work to do but the implications that will flow from the ECB’s Asset Quality Review will come far more rapidly.

Amidst the torrent of comment on Banking Union, the Commission is now consulting on the review clauses for the ESRB and the three ESAs – required around the end of 2013. Buba’s Weidmann spelt out some of the other factors: “the main task of the single resolution mechanism…is to ensure the correct sequence of liability is applied in such a process. If a bank is to be restructured or resolved, equity investors should be the first port of call, followed by the providers of debt capital, and only then the depositors, taking due account of deposit guarantees…taxpayers should only be called upon as a very last resort”.

Post Cyprus, depositors seem to be getting a little more priority but can clearly expect some significant bailing-in. Commissioner Barnier dealt with the possible change of timetable for applying the bail-in tool: “The Commission proposed that the bail-in tool would be applicable from 2018. The ECB and others have recently called for an earlier application. Let me be clear on this point: We are not against an application from an earlier date. But …” He went on to state his belief that “we need one centralised resolution authority. It should have a light but efficient and credible structure.” Could such a light structure chime with the new-found German belief in a network of supervisors that would not require a Treaty change?

A key element of the SSM is the need for the ECB to supervise a myriad of national discretions in CRD IV/CRR even though a ‘single rulebook’ is said to be the foundation stone of the whole process. So it was disappointing for the EBF to say that these newly-agreed rules fall short of fully achieving a Single Rulebook. “The agreed regulation has left a surprising degree of flexibility to Member States to vary central parts of the requirements on grounds of macro-prudential oversight, including different national capital buffers”.

The opposition to the Financial Transaction Tax (FTT) seems to be intensifying, so much so that the leading MEP proponent - Anni Podimata - argued that “the Parliament will not allow the proposal to end up as a skeleton”. City of London published a study saying the EU transaction tax could be costly for the UK. According to the study from London Economics, “The impact of a financial transaction tax on corporate and sovereign debt', the planned EU tax on transactions would raise the cost of issuing UK debt by nearly £4 billion. That may explain part of the reasoning for the UK to lodge a complaint against it in the European Court of Justice, as it is concerned over the extra-territorial implications of the tax.

In the same vein, the IIF published an analysis listing the disadvantages: burden on private investors; risks to economic growth; higher cost to hedge risks; potentially dramatic impact on European repo markets; higher cost of sovereign funding and concerns about extra-territoriality. The risks to the repo market were amplified by ICMA, who warned of a major contraction in the repo market of the EU11 that would have a number of unfortunate consequences. The loss of repo and the lack of an alternative secured financing instrument would pose serious problems for institutional and corporate investors, who would be forced into unsecured deposits which are not subject to FTT. Lending by banks to industry would be compromised by banks being unable to borrow readily from institutional investors and manage their liquidity in the interbank market. Citi went further and argued that the importance of the repo market extends far beyond just bank funding; it is central to market-making and the provision of liquidity.

The potential implications of the long-term investment agenda are now being recognised. Van Hulle – the architect of Solvency II - argued that the long-term investment agenda must not side-track Solvency II to encourage insurers to invest in infrastructure projects and other long-term assets. The BIS has added the IAIS to the long list of regulators hosted in Basel and is now opining on ‘Insurance and financial stability’. Initial comments covered the economic environment, including the deterioration of the creditworthiness of many sovereigns and the protracted low rate environment ("low for long"). “Low rates for long can put solvency pressure on those life insurers that have committed to delivering too-high returns for policyholders. But if customers do go elsewhere, who will provide the long-term financing needed by the real economy?”

In the background, concerns are rising about the right accounting treatment for the new economic and regulatory realities. Derivatives users may lose hedge accounting privileges on trades that have been amended to face a new counterparty - known as a novation. A joint field test on the IASB's expected credit losses model for financial instruments is underway. But IASB’s Hoogervorst said that “The truth is that, outside the financial industry, most companies have little to do with fair value accounting. The bulk of their assets and liabilities are measured on a cost basis.”  One proposal is that the measurement of the insurance liability should be based on the expected return on the assets held by the insurer. While some in the insurance industry are enthusiastic about this idea, the IASB has its doubts. The IASB calls this “hope-and-wish”-accounting. The IASB does not think it is prudent to base the measurement of a liability on an uncertain yield of assets. ‘Buy-and-hold’ should not turn into ‘buy-and-hope’.

Graham Bishop

© Graham Bishop