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Welcome to our Gold Friends weekly e-mail.
Later today, President Macron’s brainchild – the European Political Community – has its first meeting and the think tanks analyse the possibilities. Nearer at hand, the ESRB has issued its first general warning of severe risks to financial stability as the IMF commented on the obvious risks of open-ended mutual funds offering daily liquidity to investors while investing in illiquid assets. The global `committees’ (BCBS/IOSCO/CPMI) published their sobering findings on the margining practices during the early 2020 crisis – with the UK’s gilt market crisis last week neatly illustrating these apparently-remote but dramatic risks. On the brighter side, BCBS published its report on the implementation of Basel III and showed that, globally, bank capital ratios hit decade-high levels. EURACTIV reported that EU banks are exposed to €239 billion in fossil fuel assets. ESMA reported on the risks of cryptoassets to financial stability while Finextra published SWIFT’s successful trial of its ability to link such assets (and CBDC) `smoothly’ via DLT into the traditional payments system…. Graham Bishop
Articles from 30 September - 6 October
Policy impacting Finance CER podcast: What might Macron's European Political Community look like? : Emmanuel Macron set out his vision for a 'European Political Community' in a speech to the European Parliament in Strasbourg on May 9th. Podcast by Charles Grant, Camino Mortera-Martinez View Article
EPC' Mucznik: The European Political Community: Time to invest in the power of democracies : A values-based European Political Community (EPoC) should clearly and unambiguously state that it expects its members to share a democratic and like-minded character. Rules, principles, and red lines should be established at the beginning and not halfway through the process. View Article
Bruegel podcast: What should the European Political Community look like? : Discussion of a European Political Community ahead of the summit in Prague on 6 October. View Article
CEPS' Emerson: Will the European Political Community actually be useful? : On 6 October 2022 there will be an inaugural EU meeting at summit level, with the EU’s close neighbours also invited, to debate security and stability as part of a budding European Political Community (EPC), as proposed by President Macron with support from President Michel. View Article
FT: Europe faces ‘severe risks’ to financial system, regulators warn : Ukraine war could create combination of slow growth, falling prices and market stress, according to ESRB View Article
Eurogroup, 3 October 2022 Main results : Macroeconomic situation in the euro area, Euro area recommendations, Preparation of international meetings, Digital euro – business models of public and private participants in the digital euro ecosystem View Article
Remarks by Paschal Donohoe following the Eurogroup meeting of 3 October 2022 : We also reiterated the need to speed up our reduction of energy consumption, which is critical to stabilising energy prices and reducing our reliance on Russian fossil fuels. View Article
LSE: A populist shift or business as usual? Explaining the outcome of the Italian general election : Fratelli d’Italia emerged as the clear winner from Italy’s general election, but what explains the party’s success? Giovanni de Ghantuz Cubbe highlights the key factors that led to the result. View Article
Fondation Robert Schuman: A change of era (Zeitenwende) in Germany and its implications for European integration : The Russian aggression in Ukraine, on-going since 24 February 2022, has shattered the European collective security system that was patiently built up in the 1970s and which has been consolidated since the end of the Cold War. View Article
CEPR/Vox's Buti/Messorri: A central fiscal capacity to tackle stagflation : In the past year, there have been many calls for a permanent central fiscal capacity at the EU or euro area level. This column argues that a European central fiscal capacity would improve policy efficiency by focusing on stabilisation in the event of demand shocks and on boosting potential output in the event of supply shocks. View Article
ECB's de Guindos: Policy mix of the future: the role of monetary, fiscal and macroprudential policies : Macroprudential policy addresses risks to financial stability. Our strategy review acknowledges that financial stability is a necessary condition for price stability. View Article
IMF blog: How Illiquid Open-End Funds Can Amplify Shocks and Destabilize Asset Prices : Mutual fOpen-end investment funds, as they are known, have grown significantly in the past two decades, with $41 trillion in assets globally this year. That represents about one-fifth of the nonbank financial sector’s holdings. unds holding hard-to-sell assets but offering daily redemptions can spark volatility and magnify the impact of shocks, especially in periods of market stress View Article
Banking Union SSM's Enria: Better safe than sorry: banking supervision in the wake of exogenous shocks : Today I will focus on the risk outlook for the euro area banking sector at this delicate juncture and on the approach taken by the ECB to ensure banks remain focused on risk management and on prudently monitoring the multi-faceted downside risks emanating from a fast-changing economic environment. View Article
Daisy chains: Council adopted a revised bank resolution framework : The ‘Daisy Chain’ regulation introduces targeted adjustments that improve the resolvability of banks. It helps to ensure that banks remain resilient and capable of withstanding shocks. View Article
EBA assesses the market share of non-EU entities in the EU banking system and the dependency of EU banks on funding in foreign currencies : As of June 2021, 360 banks controlled by non-EU entities were operating in the EU representing 12% of the Union’s total banking assets. At the same time, EU banks had, on average, 19% of their total funding denominated in significant foreign currencies. View Article
SRB: Guest blog - Westman: The Liikanen Report and the proposal for a resolution framework – 10 years on : While the proposal for structural reform in the banking sector was not implemented in the EU, many of the ideas brought forward by the high-level expert group can be found in other regulatory initiatives. View Article
Basel Committee publishes evaluation of buffer usability and cyclicality in its regulatory framework; issues newsletter on positive cycle-ne : New evaluation report finds some indications of a positive relationship between banks' capital headroom and lending and further evidence that temporary reductions in capital requirements supported lending during the Covid-19 pandemic. View Article
Basel Committee reports on Basel III implementation progress : Update shows further progress since previous report in October 2021 in implementing both standards with past due dates and outstanding standards with 1 January 2023 due date. View Article
Basel III capital ratios for largest global banks rose last year to the highest level since 2012, latest Basel III monitoring exercise shows : Initial Basel III capital ratios increased to the highest level since the beginning of the exercise in 2012, and banks' profits remained at or near record high levels across all regions in H2 2021. View Article
CEPR/Vox: Making the EU macroprudential framework fit for the next decade : The European Systemic Risk Board has been one of the guardians of financial stability in Europe for more than a decade. Much has been achieved in its first decade, however the framework must evolve to meet new challenges. View Article
POLITICO: RUSI's Keatinge - Illicit finance is an Achilles’ heel for EU security : Dirty money is undermining European democracy, and the effective implementation of sanctions against Russia is just part of an urgently needed response. View Article
Capital Markets Union AFME's Garcia: Should Europe join the race to shorten settlement cycles? : Significant technological advances have changed the way we work, live and interact. This is no different for securities markets, where the industry continues to seek opportunities to improve efficiency through advancements in technology and standardisation. View Article
BCBS-CPMI-IOSCO finalise analysis of margining practices during the March 2020 market turmoil : The report presents a data-driven analysis examining margin calls in March and April 2020 and the extent to which market participants were prepared to meet them. View Article
Strengthening the resilience and sustainability of the insurance and pensions sectors: EIOPA sets out its strategy for 2023 – 2026 : Building on a strong foundation, the strategy is designed to strengthen the resilience and sustainability of the insurance and pensions sectors, and to ensure the strong and consistent protection of consumer interests across the European Union. View Article
Environmental, Social, Governance (ESG) Climate finance: Council adopted conclusions ahead of COP27 : REITERATES the strong commitment of the European Union and its Member States to lead by example in ambitiously contributing to the implementation of all of the goals of the Paris Agreement and implementing the Glasgow Climate Pact. View Article
ESAs propose disclosures for fossil gas and nuclear energy investments : In the amending final draft RTS, the ESAs propose to add specific disclosures to provide transparency about investments in taxonomy-aligned gas and nuclear economic activities. View Article
FSB's Knott: Navigating climate-related financial risks : First, what data and tools do financial institutions, including asset managers, need to properly manage financial risks from climate change? Second, what needs to be done to ensure the stability of the financial system as a whole amidst climate change? View Article
EBF president says that governments, regulators and banks in Europe should work together to accelerate the green transition : Ana Botín, European Banking Federation (EBF) President and Executive Chair of Banco Santander, has today urged European leaders to work together with banks to accelerate the transition to net zero in response to the energy and climate crisis. View Article
EURACTIV: Top EU banks exposed to $239bn in fossil fuel assets : A new report published by Finance Watch unveiled the exposure of EU banks to fossil fuel assets and called for higher capital requirements to ward off the financial stability risk of stranded fossil fuel assets. View Article UNEP: Net-Zero Asset Owner Alliance calls on policymakers to support scaling blended finance : The Net-Zero Asset Owner Alliance is calling on policymakers to support scaling blended finance, an instrument that can help address structural deterrence to investments in EMDEs (where the risk level is normally too high for institutional investors). View Article
Bruegel's Grzegorczyk/Wolff: Greeniums in sovereign bond markets : In this paper, we analyse whether green sovereign bonds are systematically priced differently to conventional sovereign bonds in the secondary markets View Article
Delors Centre's Mack: Give us the tools and we‘ll finish the job: How Europe can fix the broken audit market : The European audit market has been broken for far too long. After glaring audit failures in the recent past, the legislation is once more under review. View Article
Protecting Customers EIOPA calls for better value for money in bancassurance in warning to banks and insurers : In its warning, EIOPA calls on insurers and banks to take action or risk facing supervisory measures. It follows a thematic review - also published today - on the functioning of the EU market for CPI products sold with mortgages, consumer credits and credit cards, which revealed a number of practices that could cause detriment to consumers. View Article
Fin Tech Regulation ESMA: Crypto assets and their risks for financial stability : ESMA has been following these developments closely for several years, including because of their risks to consumer protection (2), and outlines in this article the latest understanding of crypto-assets’ risks and transmission channels to financial markets. View Article
MEPs call for using blockchain to fight tax evasion and an end to crypto asset non-taxation : It sets out a framework through which both goals of using blockchain in taxation and uniformly taxing crypto assets can be achieved. View Article
ICMA co-signs joint trade association response to BCBS second consultation on the prudential treatment of crypto-assets exposures : The Associations’ comments aim to improve the mutual understanding of current and emerging risks of private digital assets that depend on cryptography and distributed ledger or similar technology,.. View Article
Bruegel's Carugati: How the European Union can best apply the Digital Markets Act : The European Union’s new Digital Markets Act will enable the European Commission to get ahead of potential anti-competitive behaviour. View Article
BIS: Big tech regulation: in search of a new framework : In the case of big techs, most of the risks arise from their ability to leverage on a common infrastructure – notably large amounts of client data – that helps them gain a competitive advantage in a wide variety of non-financial and financial services and create substantial network externalities. View Article
Finextra: Swift finds role as global hub for CBDCs and tokenised assets : Financial messaging network Swift has released the results of a trial that allowed digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts by bridging between different distributed ledger technology (DLT) networks and existing payment systems View Article
Economic Policies Impacting EU Finance ECOFIN: Taxation: Anguilla, The Bahamas and Turks and Caicos Islands added to EU list of non-cooperative jurisdictions for tax purposes : The Council regrets that these jurisdictions are non-cooperative on tax matters and invites them to engage with the EU’s Code of Conduct Group in order to resolve the identified issues. View Article
Brexit Ukandeu: Why David Cameron called the 2016 referendum - and why he lost it : Tim Bale looks back at the 2016 Brexit vote and considers why David Cameron decided to call the referendum on the UK’s membership of the European Union – and why he went on to lose it. View Article
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