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24 January 2017

126th Brussels for Breakfast – Notes

Brussels for Breakfast debate focused on the latest political, economic and financial developments in the European Union: Theresa May's speech, the potential influence of US President Trump, the drive for Capital Markets Union, the location of euro-denominated clearing after the UK leaves the EU...

Paula Martín/GrahamBishop

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenter Fiona Wright (Brunswick)

This blog covers the key subjects since our last meeting that I hoped to cover but, as always, we ran out of time to deal with them all. As a Friend, you can watch the 19th `structured’ CPD web-cast with CISI. These Notes may be read to record a further 30 minutes of `structured CPD’, including a dipping into the links to the underlying stories.

Highlights from the “Brussels for Breakfast” meeting

The first meeting after the Christmas break attracted a large - and vocal – audience! Naturally, Brexit consumed half the time but we still covered some very detailed issues in banking and securities.

Opinion polls show there is not yet any sign of an upsurge in other major states wishing to leave the EU and that UK voters are unwilling to pay even a significant price for Brexit. So Prime Minister May’s speech last week was dissected at some length – particularly the tactic of being willing to walk away as that weakens commercial operator’s confidence in possible transitional agreements. Such arrangements cannot be assumed with any degree of confidence until late in the process. In any case, I put the argument (detailed in my Clearing paper: link for clients or request an Invoicethat the legal formalities of such a process may be lengthy.

The potential influence of the new President Trump was discussed. However, the real significance is likely to unfold over the next year when the 2017 election season is over in the EU, and European electors assess whether the attacks on NATO and European security look as though there will be real consequences.

Turning to detailed banking matters, the EBA’s final recommendations on loss absorbing capacity – the MREL stack – provoked much thought. As the profitability of Europe’s banks is only half its cost of capital, there can be no certainty that the system can support the needs of the economy. So the continued drive for Capital Markets Union should be underpinned.

My paper on the clearing of euro-denominated derivatives (see above) also provoked much discussion as the sheer quantum of risk in London – at 50 times UK GDP – is quite startling. Yet again, the canard was floated that the `swap line’ with the ECB would ameliorate these risks but my clear understanding is that there is no agreed line – merely a legal document to be signed if there were to be a swap agreement. The ECB’s July 2016 – so post the Brexit referendum – makes clear the grave concerns about the location of such key infrastructure outside the EU given its potential impact on financial stability.

Key items in the rest of the month’s news included:


Prime Minister Theresa May set out the Government’s priorities for the upcoming Brexit negotiations in a long-awaited speech that was regarded by The Economist as a pledge to ‘eat the cake and live with an empty plate afterwards.’ Graham Bishop pointed out that the PM’s plan was riddled with inconsistencies and set out to cherry-pick the Single Market, precisely what EU leaders have been repeatedly refusing since the UK voted out. This might be what the UK Ambassador to EU Sir Ivan Rogers suggested when he unexpectedly resigned and warned of ‘muddled thinking’ when it comes to the terms of the forthcoming leave talks.

May confirmed that the UK would be pulled out of the EU’s Single Market and that it wouldn’t seek its permanency in the customs union either. Britain will rather pursue a ‘global’ vision that unties itself from the Union’s regulatory ‘constraints’ and competes with the rest of the world as a major player in many sectors. This might mean defaulting to WTO membership if no agreement is reached before the two-year period after triggering Article 50 of TFEU, but The Economist cautioned that this option wouldn’t be easy either. May interprets the ‘No’ vote as a popular appetite for lowering immigration, even at the cost of a certain degree of prosperity - but more than half of Leave voters find unacceptable being economically worse off to regain control of UK borders over EU workers coming to Britain.


In May’s view, the European Union will remain a reliable partner and avoiding its unravelling is in both parties’ interest – and Europeans feel it that way, but EU officials have been warned by Chancellor Hammond and May herself that the UK will walk away from a bad deal and turn into an offshore tax and regulatory haven by slashing corporate tax rates – one of the strategies outlined in Bloomberg’s guide to cut EU’s unity. The economic damage that would result of cutting the UK adrift is a significant concern for EU negotiator Michel Barnier, who The Guardian reported to have said: “There will be a special/specific relationship. There will need to be work outside of the negotiation box… in order to avoid financial instability” - Barnier later clarified that he referred to a “special vigilance.” [...]

Full article available for consultancy clients here

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