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This blog complements the subsequent 51st Brussels 4 Brunch 30-minute CISI webinar that is also available to Friends of GrahamBishop.
We want to involve the Brussels Finance Watchers community in the choice of future topics so my up-coming video invitation for the 162nd meeting (still planned for April 8th ) will include my then-current thinking about the top three topics - but we welcome your suggestions to graham@grahambishop.com
Naturally, the Brexit negotiations took centre stage – though the subsequent discussion on the plight of EU banks proved to be very sobering.
We analysed the EU negotiating directive first and then the UK proposals. A key point is that the EU position is a formal Directive – approved by all 27 states - so Barnier has little discretion unless he goes back to all 27 for a change. The EU is seeking a deep and comprehensive agreement that is overarching and with a single governance system to cover wide areas of activity. For financial services, the only real change from the draft paper of 3rd Feb is the addition of a paragraph that underlines that equivalence is defined and implemented unilaterally by the EU. Whatever conversations may be held, the EU’s regulatory and supervisory autonomy will be maintained.
The UK position is also blunt – a negotiation between sovereign “equals” that maintains the UK’s autonomy. If there is no agreement, then the UK’s trading relationship will look similar to Australia’s. This reference has caused bemusement in Brussels as there is no agreement with Australia – just negotiations getting underway on a WTO-style deal with a few add-ons. So this is simply code for “no deal”.
One participant felt that the two sides are closer than people think. Moreover, both sides are about to publish draft Treaty text. That may make it clear that the UK simply wants a “bare bones” free trade deal and that may be agreed relatively easily. However, the EU is very concerned about the UK back-tracking on the Irish deal and on the Political Declaration so there may yet be a major loss of trust and confidence. The atmosphere could become even more poisoned as it becomes apparent that cross-border trade really will have frictions that – in the first instance – cause huge traffic jams at the Channel ports.
Turning to European banks, the extraordinary measures in Italy reminded us all that even the most recent economic forecasts can now be binned – and they were not upbeat anyway! EU bank stocks – measured by the Stoxx index - have fallen more than 30% in recent months – especially after plummeting this week to a level more than 20% below the lows seen in 1987. As major banks’ shares sell at 40% of book value and the cost of equity has soared above 15%, shareholders are unlikely to provide new equity in the near future. However, the EBA has just pointed out that well over 100 significant banks still need to raise nearly €200 billion of MREL capital.
So if that is not enough bad news for banks – which still provide nearly 90% of credit in the EU – the details of the new “sustainable” Taxonomy were published. If EU banks indeed do as requested and reduce/shun further loans to non-green projects, then the risk rises of a string of bad loans – underlined by the oil price collapse undermining the economics of some projects anyway. Is this the ultimate perfect storm for the EU’s banking system?