After the collapse of discussions at Eurogroup yesterday, the focus was on the mechanical implications for the financial system rather than the politics. Nonetheless, it is clear that an agreement is within reach in the time available. But history is full of examples of confusion, mistake and misunderstanding that unexpectedly led on to disastrous consequences. There is too much talk of game theory and a game of chicken – see my note yesterday comparing Greece to a Fiat 500 versus the Eurogroup 50-ton tank.
The immediate risk to the Greek banking system stems from the laws that bind the actions of the EU players such as the ECB, SSM and Single Resolution Authority (SRA) in applying the newly-enacted BRRD. These entities must operate applicable laws and it would take time to change them – even if there were the appetite amongst the other members. A historic catastrophe can be avoided - but cannot now be ruled out.
ING has just published an excellent report on the possible costs of Brexit and the House of Lords report on the “post crisis EU financial regulatory framework” sets out some shortcomings but suggests that the powers of the ESAs need to be enhanced. Moreover, the bulk of the EU’s actions would have been implemented by the UK if the EU had not acted. This did not seem to be a massive shopping list of items for “reform” necessary to stave off Brexit. Parenthetically, it was noted that calls for national Parliaments to take `ownership’ of EU legislation only seem to be answered by the UK’s un-elected chamber. The CSFI on-line questionnaire about the specifics of Brexit and the City are here.
The Green Paper is scheduled to be published tomorrow – accompanied by separate papers on securitisation and prospectuses. It is not expected to differ significantly from the widely-circulated leaked version. The questions raise fundamental issues right the way along the value–chain of capital markets and highlight that some of the long-standing problems identified by the Giovaninni Group more than a decade ago are still outstanding. There are some short-term issues that will have immediate political appeal but much is likely to be legal detail that is enormously technical.
The FSB Chair (BoE Governor Mark Carney) highlighted the need to avoid reform fatigue and pointed out what still needs to be done. The Basel Committee (BCBS) also published it work programme for 2015 and 2016. It included the capital floor based on a standardised approach, fundamental review of the trading book, interest rate risk in the banking book and also TLAC (with FSB). The treatment of sovereign risk is also to be reviewed “in a gradual manner”. These constitute further profound changes to the banking system yet originate from un-elected bureaucrats…. The democratic deficit is concerning.
Next meeting: 24th March 2015
© Graham Bishop
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