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The much-vaunted March Summits came and went – but are we any the wiser about how serious Eurozone governments really are about their commitments to the euro? The headline Conclusions looked fine enough: The ESM will have an effective lending capacity of €500 billion from 2013. The preparation of the ESM treaty and the amendments to the EFSF agreement, to ensure its €440 billion effective lending capacity, will be finalised to allow signature of both agreements by end-June 2011.
The preceding Eurozone summit adopted a 'Pact for the Euro' for stronger economic policy coordination for competitiveness and convergence, thus achieving a new quality of economic policy coordination in the Euro area. The European Council – as the EU of 27 - welcomed the decisions taken by the euro area Heads and endorsed the features of the ESM. However, the distinction between the eurozone and the EU 27 caused some difficulties for the Parliament’s Constitutional Affairs committee. They want the eurozone stability mechanism to be part of the EU. MEPs were "deeply concerned" that the mechanism is an intergovernmental choice, rather than an EU one, and urged Member States to bring it within the EU system.
Commissioner Rehn replied that EU leaders must now finalise the response to the debt crisis and conclude the Commission's legislative package on schedule. However, ECON is now groaning under the weight of more than 2000 amendments to the package. Importantly, and as explained by President Barroso, the role of the Commission in the running of operations of the ESM will be central, and the link of the ESM with the EU institutions, of course including the European Parliament, will be clearly established.
The process is not going to be plain–sailing to June. MEPs consider that the ESM should be "brought as close as possible to the European Union framework." They ask for a clear commitment from the European Council to ensuring that the EU institutions are involved in ESM operations. This would mean basing ESM decisions on proposals from the Commission.
A second fundamental difficulty became clear when ECON debated economic governance with ECB President Trichet. He said a great deal of improvement needs to be done and the background to this can be found in the ECB’s Opinion on the economic governance package: The ECB calls on the EU legislator (i.e. Parliament) and the Member States to strengthen the economic governance package to the maximum allowed under the current Treaties. The Commission proposals fall short of the necessary quantum leap in the surveillance of the Euro Area which the ECB deems necessary. The ECB considers that the Task Force Report does not even go far enough either. For the ECB, insufficient automaticity is a fundamental flaw of the Commission proposals, even though the introduction of reverse qualified majority voting in the Council is helpful. The Council could issue a formal declaration that, as a rule, it will follow Commission proposals.
Taxation has swiftly come on to the EU agenda – despite the fearsome difficulties posed by the need for unanimous agreement to changes. However, Commissioner Šemeta stressed that both the EP and Council are willing to examine the possibility of innovative financing at global level. The possibilities include a Financial Transactions Tax (FTT) akin to a Tobin Tax, but its attractiveness lies in the high estimates for revenues. Secondly, there is the Financial Activities Tax (FAT), which is a tax on the sum of profit and remunerations of the sector. But is it an adequate substitute for the absence of VAT? There is a separate debate under way on the Common Consolidated Corporate Tax Base (CCCTB) for all sizes of companies. It will be optional but "Our studies show that the CCCTB will save companies across the EU up to €2 billion every year, through consolidation and reduced compliance costs.”
Bank stress tests are coming into the news again but the FSA’s Lord Turner said “We need to reduce the probability and impact of SIFI failures. The best way to do that is with equity surcharges,” and went on to argue for much higher levels of capital. Deutsche Bank’s
Ackermann said that drawing up lists of SIFIs would be conceptually wrong and will prove to be counterproductive, as systemic importance is anything but static. McKinsey pointed out the perversity that insurers, the biggest buyers of long-term bank debt, are being dissuaded from buying it by under the Solvency II rules, which makes them more expensive to hold.
EBA documents described the macro-economic scenarios, including a specific sovereign stress in the EU. The European Council called for a high level of disclosure for banks, including on sovereign debt holdings and said Member States will prepare, ahead of the publication of the results, specific and ambitious strategies for the restructuring of vulnerable institutions. However, the sovereign haircuts will only apply to positions in the trading book where losses would materialise, but will be accompanied by full disclosure of all relevant sovereign holdings. So the market will be able to work out which banks have potential problems. But does this mean that governments must only prepare re-capitalisation plans on the basis of the tests themselves… much of which will be ignored by markets as they want to know the answer to problems posed by expected re-structurings of “banking book” holdings?
Markets may have hoped that AIFMD had gone away but the FSA’s Sheila Nicoll pointed out that ESMA task forces are now preparing advice to the Commission on the 99 ‘delegated acts’, technical standards and guidelines. Hedgeweek wrote about learning to live with the AIFMD. The eventual outcome left many of the participants dissatisfied to a greater or lesser extent. However, there is a broad consensus that the changes made during the drafting and negotiating process resolved many of the more controversial aspects of the legislation and produced a text that all sides can live with – subject, of course, to the detail that must now be added.
EIOPA launched Europe-wide insurance stress tests to be concluded in May – so rather ahead of the bankers. It also published the QIS5 results on Solvency II, showing that the financial position of the European insurance and reinsurance sector assessed against the Solvency Capital Requirements (SCR) of the Solvency II directive remains sound. Currently, insurance companies who participated in QIS5 hold €395 billion of excess capital to meet their solvency capital requirements (SCR). However, Allianz’s CEO said QIS5 had “provided drastic evidence of the extent to which Solvency II needs to be revamped and improved.” He said that he could not imagine the rules remaining in place.
At last … someone questions the wisdom of pushing as many OTC derivatives as possible into CCPs! An IMF paper considered the possibility that CCPs may be 'too-big-to-fail' entities in the making. The present efforts may not remove the systemic risk from OTC derivatives, but simply shift them from banks to CCPs. In the meantime, EMIR is turning into a serious battleground that may be central to the Deutsche Borse/NYX/NASDAQ OMX set of bids. Press reports suggest a furious lobbying battle has broken out between proponents of greater competition in all derivatives markets – such as the banks that are large customers of exchanges, opposed to such silos – and exchanges that own their own clearing houses.
Credit rating agencies were again under fire from ECON, whose members are arguing for the creation of a European credit rating foundation, and called for special attention to sovereign debt ratings. Wolf Klinz's non-legislative report on credit rating agencies supports measures and initiatives that would make market players more engaged in risk analysis and reduce their over-reliance on ratings.
The audit world was shaken by a hard-hitting report from the UK’s House of Lords which found that the ‘complacency’ and ‘dereliction of duty’ of auditors contributed to the financial crisis. They argued that the Big Four auditors’ domination of the large firm audit market limits competition and choice and called on the Office of Fair Trading to hold a detailed investigation into the audit market. Graham Bishop