16 February 2016

118th Brussels for Breakfast

The debate was as lively as usual and the main topics included Brexit – inevitably a few days ahead of the vital Summit. We covered the state of public opinion and the implications of President Tusk’s letter to Prime Minister Cameron, as well as the `leaked  tracked-change’ Draft Conclusions. Also, I shared my thoughts about the reactions to the speech I gave last night at the London School of Economics on the impact on London of actually leaving the EU.

We discussed the published contributions to the Commission’s `Call for Evidence’ on financial services regulation; the Fundamental Review of the Trading Book; the postponement of MiFID; IORP II; and IAS9’s application both to banks and to insurers - given IAS4.

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Looking at President Tusk’s letter to Prime Minister Cameron, I feel the City may not be too pleased at the way in which it is to be `protected’: “single rulebook concerning prudential requirements for credit institutions …may need to be conceived in a more uniform manner” for the euro area but for non-banking union states “different sets of Union rules may have to be adopted in secondary law, thus contributing to financial stability.” What can this mean? This seems to give the UK the right to have tougher rules as it would be an extraordinary breach of the single market to have lower standards. So the UK could gold-plate say capital adequacy standards via higher capital requirements for UK banks – a long-held objective since arguments over CRDIV to ensure financial stability in the UK given its outsize banking sector.

The discussion around my speech “The Implications for London if the UK were to exit the EU” at the LSE proved very interesting. The speech was an attempt to identify the range of results that might happen if the referendum vote were to `leave’. I stated the well-known contribution of the financial services industry to UK tax revenues and to foreign exchange earnings but no-one could be precise about how much these contributions might be reduced if the euro clearing and settlement business moved into the  euro area’s jurisdiction – as was accepted as highly likely,  and indeed economically appropriate. This is essential information for the public to make an informed decision and the analysis must surely fall to the Bank of England – as the only body with access to the information.  

• Fundamental Review of the Trading Book Framework: the BCBS published its revised market risk framework designed to ensure that the standardised and internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions. However, GFMA, IIF and ISDA were concerned that the rules may have a negative effect on banks’ capital markets activities and reduce market liquidity because there would be a 40% increase in capital requirements on average. 

• European Commission’s “call for evidence”: We discussed the wide range of responses from many professional associations including EBF, BBA, ICMA, AFME, IA, AIMA, EFAMA, Insurance Europe, FEE. ECON’s report triggered much discussion about the possibility that there would be almost continuous reviews.

• Commission extends by one year the application date for the MiFID II package but still plans to produce the Level 2 measure quite soon.

• EBA launched an impact assessment of IFRS 9 on about 50 banks in the EU. FEE expressed its concern about the interaction with IFRS 4 – insurance contracts. ESMA accepted that both the overlay approach and the temporary exemption from applying IFRS 9 are needed to address different concerns raised by the insurance industry. 

© Graham Bishop