Graham Bishop/Paula Martín Camargo
Organised by the Centre for the Study of Financial Innovation (CSFI) with co-presenterLucy McNulty (Financial News)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 33rd `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
Now that we are less than 300 days to go, we believe this meeting cannot add enough value to the torrent of media comment so we are reverting to focussing only on the financial services developments in the EU since the last meeting.Brexit will only be mentioned if there is a specific operational implication from a regulatory development. This new process did indeed give us time to range far more broadly to discuss the big issues around banking union and capital markets union, as well as some of the welter of details that continue to fill out the big decisions taken in the “glory days” after the Great Financial Crash.
Banking union has to remain top of the agenda as the Commission is pushing very hard to get it “completed” before the legislative window shut after the Parliament’s last Plenary on April 19th next years – ahead of its elections now agreed for 23-26 May. ECOFIN finally agreed its position on the banking package of November 2016. But the final piece of the jigsaw is widely thought to be EDIS and the prospect of Germany agreeing to that seems to have receded as the Italian crisis grew.
The ECB made a string of comments about the need for a “safe asset” to buttress banking union and reported that the LCR effectively requires banks to hold government securities equal to an average 100% of their CET1 capital. The doom loop is alive and well! But CMU also needs a risk-free yield curve to price fixed income securities and the Commission published their proposal for SBBS to kill both birds with one stone. However, unanimous opposition from the EU’s government debt managers – as well as the new German finance minister – does not augur well. Perhaps the time is now “ripe” for my plan for a Temporary Eurobill Fund.
CCPs were back in the news as ECON agreed its report – which included a provision for a review of “recognition” of third-country CCPs every 2-5 years. Moreover, the ECB launched a major explanation of the rationale for amending Article 22 of its Statutes to empower it to localise systemically import euro CCP activity.
On a broader note, the Commission’s three- yearly “aging report” suggested that public spending on pensions only needs to rise from the current average of 11% of GDP to 13.5% in the eurozone by 2040.
Selected key topics of the Month
Less than 10 months away from the formal date of departure, the UK's European Union exit process is more convoluted than ever. Prime Minister Theresa May’s inner cabinet hasn’t yet been able to agree on a feasible solution that will deliver on her promise of a full-scale Brexit while maintaining seamless trade with the bloc and therefore she will most likely miss her self-imposed June deadline for setting the complete deal in a paperwhich would provide the EU27 with a better understanding of what the UK actually wants for a future EU/UK relationship and pave the way for progress at the European Council meeting at the end of the month. A short paper on the Customs Union issues seems quite insufficient. But EU officials such as Germany’s Brexit Coordinator Peter Ptassek aren’t expecting much of June’s Council, and warn that all essential issues – Northern Ireland border, the future trade model the UK wants, governance of the final deal - would then have to be dealt with in October. Too tall an order for a single meeting that’s still distant in time.
Uncertainty over the loss of the “passporting rights” for financial services based in the UK after withdrawal has made the most important financial firms in London boost their contingency plans for an adverse scenario and a race to reassure their position in Europe by opening new offices in financial hubs within the EU – given the time pressure and the flood of requests from UK-based companies, the European Central Bank hinted it will give banks more flexibility to meet the criteria required to build up their units in the EU.
In its desperate efforts to secure access to trade in services across the EU’s single market, the UK Treasury might end up giving away power over the rule book, the Bank of England decried, a fear that has led to a clash between both institutions with the BoE opposing any compromise that would leave it as “a rule taker”. Open Europe think tank praised Britain’s central bank for resisting complete adherence to EU regulation, and put forward a proposal to abide by European rules in goods but be able to diverge in financial regulation, a compromise authors think European officials might be willing to accept.
Equivalence of financial rules has been seen as a feasible – though not as solid as single market membership - solution for EU access if financial companies finally were to lose free operating rights across Europe, but France’s bid to toughen MiFID rules for third countries, according to a document seen by Bloomberg News, is likely to put an end to British traders’ hopes.
Billions of euro-denominated bonds are cleared every day in London, and Brussels wants to retain control over a business with such potentially destabilising power for European markets: ECB official Yves Mersch defended the rationale behind the change of the ECB's Article 22 to confer the bank bigger powers to supervise clearing houses. The Bank of England's Deputy Governor in Financial Stability Sir Jon Cunliffe sought to reassure the EU about the BoE’s management of concentration of counterparty risk in CCPs and called for the establishment of a resolution regime for CCPs.
Regulators assessed the impact of the prospect of Brexit across industries: TheCityUK issued a report on UK fund management showing the distortion that the pound devaluation following the vote to exit the EU had caused in the sector; while the European Payments Council published a position paper on Brexit and UK PSPs’ participation in SEPA schemes; and EIOPAcalled upon national supervisory authorities to ensure that all insurance risks arising from the UK departure are properly addressed. But risk monitoring won’t provide firm guarantees over the continuity of insurance policies post-Brexit, the EU’s financial services chief Valdis Dombrovskis warned, urging firms to take preventive measures.
Six years after the signature of a basic agreement on a banking union, with supervision by the European Central Bank, not much progress has been made in the efforts to provide the Eurozone with a backstop resolution fund for banks that would deepen the European Monetary Union. As he leaves his post at the European Central Bank, Vice-President Vítor Constâncio made an energetic case for completing EMU, saying that Southern European countries have done enough to reduce risk in their financial systems and therefore the bloc should speed up the banking union project with the introduction of risk-sharing elements.
Constâncio implicitly criticised Germany’s foot-dragging on the issue – he is concerned that it will result in disappointing progress at the next meeting of Eurozone members: German Chancellor Angela Merkel delivered a long-awaited answer to French President Emmanuel Macron’s call for far-reaching EU reforms whose budget target falls short of the range proposed by Macron but supported the suggestion of turning the ESM rescue fund into a European Monetary Fund (EMF) to help members hit by sovereign debt troubles with short-term credit lines. The reforms should contribute to remove the “debtor-creditor relationship as a salient division between member states," wrote Martin Sandbu on the FT.
Merkel urged governments to step up efforts to integrate the euro area because the European Central Bank is seeking to phase out its expansive monetary policy and some policy makers are embracing expectations for possible interest-rate increases in mid-2019. The German leader’s efforts to overcome resistance within her government to push ahead with reforms in the euro area was supported by other ECB officials: ECB President Mario Draghi threw his weight behind French demands to complete the eurozone’s banking union; whereas ‘hawks’ such as Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the ECB, urged national regulators to allow pooling control over banking supervision and resolution. Olli Rehn, Deputy Governor of the Bank of Finland said to be a dark horse candidate to replace Draghi, said that completing the Banking Union would support “rock-solid financial stability” in Europe.
Failure to move forward with a reform of the euro area now may lead to its collapse in the future, warned professor Jeffry Frieden in VoxEU, praising the proposals put forward by French and German economists at CEPR in January proposing a "constructive approach to euro area reform", but Hans-Werner Sinnwrote in Project Syndicate that the European Commission and the ECB are wrong to advocate a one-size-fits-all Europe-wide deposit insurance scheme. Isabel Schnabel, one of the authorsof the in the CEPR Policy Insight, and Nicolas Véron, senior fellow at Bruegel and PIIE think tanks, went further, arguing that “a more ambitious long-term vision for complete banking union implies the removal of all cross-border distortions within the euro area banking market.”
Political turmoil in Italy, which recently elected an Eurosceptic government, is “another argument for reforming now,” Schnabel said, arguing that even small-step eurozone reforms would be better than no deal. A view opposed by the member of the German Council of Economic Experts Peter Bofinger, who wrote that the specific insolvency risk of euro area membership is the main risk that should be covered by joint risk sharing. European Commission chief Jean-Claude Juncker pointed at developments in Italy and Spain, where conservatives in power were toppled in Parliament by a no-confidence motion called after a corruption scandal, to remind EU leaders about the urgency of progress towards a full EMU.
The Council agreed its stance on proposals to reduce risk in the banking industrywhich will enable policymakers to make progress on other elements of the banking union. The proposals implement elements agreed by the Basel Committee and by the Financial Stability Board in bank capital requirements and the recovery and resolution of banks in difficulty. The US Congress is taking the opposite direction and passed a bill to roll backsome post-financial crisis-era Dodd-Frank reforms.
The Association of German Banks published a position paper stressing that European banks should play a central role in the Capital Markets Unionproject because they are at the centre of the European economy, a view backed by the EBF whichreiterated the commitment of the banking sector to support growthand to work towards a true CMU.
The ECB’s Financial Stability Review found that better growth prospects had helped financial stability conditions in the euro area to remain favourable, but warned that risk-taking in most financial markets had intensified. The bank published the summary of responses to its second public consultation on developing a euro unsecured overnight interest rate.
The EBA and the ESMA published a joint statement encouraging institutions and authorities to properly consider retail holders of debt financial instruments in resolutions, while the European Parliament issued a briefing toexplain why the completion of the Banking Union may need to be underpinned by further progress in harmonising Member States’ insolvency law, from a ‘banking resolution’ perspective.
The EBA consulted on standards on estimation and identification of an economic downturn in IRB modelling.
Capital Markets Union
The Commission launched a risk reduction proposal to enable sovereign bond-backed securities to support further integration and diversification within Europe's financial sector, a move to deepen EMU. Vice-President Dombrovskis clarified that SBBS do not imply any mutualisation of risks or losses among Member States. This is an important point that seeks to appease German critics of the proposal, which has been greeted as “crucial” to banking union by the FT.But economists at VoxEU branded the plan “potentially disruptive,” and argued instead for an improved euro area architecture that would, in the long run, make all euro area sovereign bonds safer.
Dombrovskis urged lawmakers to adopt measures towards CMU, now that Brexit is approaching and the Parliament election dates have been confirmed, and to focus on three main dimensions of the project: EU-wide financial products such as the Pan-European Personal Pensions Product; on consistent supervision of EU capital markets, with the EC proposal to strengthen the supervision of Central Counterparties; and on simplifying rules and reducing the regulatory burden on companies. The Commission also proposed new rules to give small and medium enterprises (SMEs) better access to financing through public markets.
Economic and Monetary MEPsbacked plans to set up an ESMA supervisory committee for EU CCPs and impose stricter rules on third country ones, depending on systemic risk. ESMA issued final guidelines on anti-procyclicality margin measures for CCPs under EMIR.
BCBS and IOSCO issued criteria for identifying simple, transparent and comparable short-term securitisations that were followed by Commission’s new rules to stimulate insurers' investments in simple, transparent and standardised (STS) securitisation. PCS outlined the key issues that remain a key necessary step to a viable European securitisation market.
ESMA published its Final Report on Guidelines on certain aspects of the MiFID II suitability requirements. The financial rules are shaking European markets: the reform is making companies bypass brokers and banks to avoid disclosing researching fees, the FT reported. Banks and brokers have already suffered a “dramatic” fall in the fees asset managers pay them. Nordea bank warned that MiFID IIis likely to exacerbate a slump in the number of analysts covering smaller companies.
IOSCO Annual Conference focused on key challenges facing securities regulators. AFME called for further progress in European post trade reform, and ESMA published its latest set of semi-annual statistical data on the performance of credit ratings.
On 25th May, a major upheaval in data protection that goes beyond the EU’s borders sent waves across the Atlantic and shook many industries: the new General Data Protection rules became applicable after a two year transition period. The UK will still have to comply with the privacy rules after Brexit in order to ensure seamless data sharing in Europe, the UK chancellor admitted. The European Parliament's Internal Market Committee also approved a draft law to remove barriers to free flow of non-personal data in the EU.
Consumers should be put at the centre and should be available to have a say over the rules that affect their daily lives, according to European institutions: The ECA is examining public participation in EU law-making, in particular the public consultations with stakeholders undertaken by the European Commission when preparing its legislative proposals.
The Global Ethics Board, the IESBA, consulted on professional scepticism.
Insurers got ready to deal with the challenges 2018 brings to the industry and assessed last year’s performance: EIOPA launched its fourth stress test for the European insurance sector, which for the first time addresses the exposure to cyber risk and best practices in dealing with it, whereas Insurance Europe published its 2017–2018 Annual Report, setting out the European insurance industry’s positions on the main insurance issues of the day.
A survey of senior UK insurance professionals found that accountants think that the new International Financial Reporting Standard, IFRS 17, will increase costs in the insurance industry, but also improve financial transparency.
Concerns are mounting regarding the Commission’s proposed collective redress system, with an insurance industry insider warning the proposal may open the door for typically American third-party litigation funders’ class actions.
EFAMA published its latest Investment Funds Industry Fact Sheet, which provides net sales of UCITS and AIFs for March 2018. Data collected showed that strong uncertainty in markets boosted net sales of multi-asset funds that month.
European are living for longer and this is posing significant challenges for the sustainability of public finances in Europe: the Council endorsed a report that calls for policymakers’ swift action, while a study mandated by the Commission concluded that public spending on pensions by EU member states is expected to peak in 2040.
Financial Services Policy
It’s taken a long time, but financial services will finally join the fight against climate change thanks to the first concrete actions ruled by the Commission to lead the way to a greener and cleaner economy. The digital transformation will undoubtedly help enable these measures but will contribute to the emerge of new non-financial risks, according to a new joint report by Parker Fitzgerald and UK Finance. One of the most interesting technologies for the sector is blockchain – the EuropeanParliament’sIndustry Committee urged to apply “blockchain” model in several areas to cut small firms’ costs and empower citizens.
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