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AFME welcomes the progress achieved towards the finalisation of the Risk Reduction Measures (RRM) package with the adoption of a position by the Council of the EU and by the European Parliament respectively in May and June 2018. The RRM package will further strengthen the resilience of the financial system, building on the very important regulatory reforms and industry efforts introduced in the wake of the financial crisis. It is also an important opportunity to provide stronger foundations to the EU’s objectives of boosting growth and investment, channel capital to the real economy, reduce fragmentation and barriers in the internal market and contribute to the completion of the Banking Union.
Well-developed and appropriately regulated capital markets are essential to channel resources and key services to the real economy. The RRM package is extremely significant for key capital markets1. Particularly important are those proposals which directly or indirectly impact on the supply and/or pricing of key services to all market users. More specifically there should be a focus on potential unintended repercussions on market-making activities and market liquidity; on government bonds markets; equity markets; and derivative markets. These unintended or excessive effects may result from an inappropriate calibration of some specific aspects of the Net Stable Funding Ratio (NSFR). Particularly crucial here are the provisions on the treatment of repos, derivatives and transactions facilitating investors’ equity investments. Similar calibration concerns apply to aspects of the Fundamental Review of the Trading Book (FRTB), and other components (e.g. the Leverage Ratio, or the Standardised Approach for Counterparty Credit Risk, SA-CCR).
Financial markets’ fragmentation within the EU, and particularly within the Banking Union, is a source of fragility and runs counter the objective of reducing risks and at the same time leads to inefficiencies in the allocation of resources and specifically capital and liquidity. As strongly emphasized by academics and regulators (particularly the ECB) shocks both in financial markets and in the real economy can be mitigated or avoided ex ante by stronger integration of, and cross-border activities in, banking markets.
AFME has been very supportive of the development of an effective recovery and resolution framework in Europe and closely involved in the implementation of the BRRD, development of TLAC and related issues. We support the principle that external MREL should be based on loss absorption and recapitalisation, but we caution against the inclusion of a mandatory Market Confidence Buffer (MCB) as we believe MREL should take account of the likely size of the firm post-resolution. We additionally think that the level of subordinated MREL that can be required under the BRRD should be set on an institution-specific basis to ensure compliance with the No-Creditor-Worse-Off (NCWO) principle. The level of MREL required, including the proportion that may be subordinated, should be easily foreseeable in order to allow banks to plan ahead.