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15 February 2017

127th Brussels for Breakfast – Notes

The 'Brussels for Breakfast' debate tackled the most relevant issues this month in the EU, such as the UK Government's 'Brexit White Paper; the IRSG report calling for a new, bespoke UK-EU deal; capital requirements under IFRS9 and the need to move on with the completion of CMU.

Paula Martín/GrahamBishop

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presenter Mark Hoban (International Regulatory Strategy Group – IRSG)

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

We had to open with Brexit and follow up on the verdict from the Supreme Court that was announced in the middle of the last meeting. The verdict was clear but the Court conspicuously refrained from opining on the question of whether the Notice can be revoked – as a matter of EU law, the issue would fall to the ECJ. The Brexit White Paper only had one page devoted to financial services and did not seem to provide any further clarity than the Prime Minster had done in her Lancaster House speech.

Mark Hoban presented the IRSG report on “The EU's Third Country Regimes and Alternatives to Passporting” which concluded that the focus of the Brexit negotiations should be on designing and delivering a bespoke UK-EU deal rather than reforming or adapting existing frameworks. A key aspect is the anchoring of EU standards to the global frameworks but discussion highlighted that the US – under its new President – may be backing away from some aspects of global bank regulation. Moreover, the issue of “dispute resolution” may become complex in the heat of a crisis.

A Commission staff paper on “Bank lending constraints in the euro area” provoked a surprising amount of discussion as the cumulative scale of the minimum capital requirements plus various buffers is only now coming into focus – with a natural impact on constraining bank credit growth. The new element highlighted in a BBA paper is the interaction of the new IFRS9 rules on moving to “expected credit losses”. There is a risk of a new element of pro-cyclicality in an economic downturn as capital is absorbed by these “expected” losses.

The problems of the banking sector underscores the EU27’s strong need to continue with an effective Capital Market Union even as Brexit occurs. However, a key component is the oft-stated efficiency of the London markets through liquidity driven be the derivatives market. This is already a politically charged topic – Eurogroup Chair Dijsselbloem was forthright that it is “unthinkable” for UK banks to do business in the EU without a sustainable coupling to EU rules.

This may come to a head deep in the technicalities of CCP resolution as ESMA has announced that the 2017 stress tests are just getting underway. This time they will include the interconnectedness of each CCP, its clearing members and the other CCPS – an exceptionally complex task. [...]

Full article available for consultancy clients here

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