|
|
OVERVIEW
After the G20 meeting in Pittsburgh, the EU turned in October to look more at its own developments. But there is also a rising tide of more philosophical analysis appearing as some thinkers begin to wonder if the current path of regulatory reform will in fact prevent any recurrence of this type of crisis. Attacks on “banker’s bonuses” may soon be seen as a substitute for harder analysis.
The G20 leaders endorsed the Financial Stability Board’s Charter to coordinate the work of national financial authorities and international standard-setting bodies. The FSB will address vulnerabilities affecting financial systems in the interests of global financial stability. However, the IMF is improving its ability to monitor countries’ financial stability and these updates will concentrate on the underlying soundness of the financial system. Is there a potential “turf war”? The FSB published two Pittsburgh reports covering policy measures for improving financial regulation, and progress in implementing the London Summit recommendations. When these are implemented, it will create a more disciplined and less pro-cyclical financial system. However, policy development is not complete and detailed implementation of the full set of required reforms will take time and perseverance.
The European Council again re-iterated the need to significantly enhance the EU regulatory framework for crisis prevention, management and resolution. It called for a comprehensive EU-wide framework for closer policy co-ordination on financial stability, including the need to develop credible alternatives to public support, notably by facilitating winding-down of cross-border financial groups, including the development of firm-specific contingency planning and resolution plans. Though it endorsed the ECOFIN Roadmap, the Finance Ministers were unable to do any better than reach “broad agreement” and they will now have to seek Heads of Government decisions on key issues. Nonetheless, the deadline of agreement by end-2009 was maintained and they will seek agreement with the European Parliament – as co-legislator – in a single reading.
FSA Chairman Lord Turner used a speech in Brussels to highlight that
the success of these proposals will depend upon the ability of the proposed ESRB to develop good quality risk analysis and the “willingness of politicians to take its warning seriously and to countenance potentially unpopular responses”. In this writer’s opinion, the absence of that political courage shows few signs of being rectified. The FSA also finalized a far-reaching overhaul of UK liquidity regulation and the rules included an updated quantitative regime coupled with a narrow definition of liquid assets. The FSA plans to issue a further discussion paper in October which will focus on key areas including systemically important firms. This will include discussion of the possible design of living wills and their implementation at both national and global level.
The Commission consulted on crisis management in the banking sector and posed questions about the tools that the Commission considers might be necessary for an EU crisis management framework.
These tools range from “early intervention” action by banking supervisors aimed at correcting irregularities in banks, to bank resolution measures which involve the reorganisation of ailing banks and to insolvency frameworks under which failed banks are wound up. The Basel Committee on Banking Supervision issued the results of its recent trading book quantitative impact study and concluded that the changes to the market risk framework will increase average trading book capital requirements by two to three times their current levels.
OTC derivatives continue to attract much legislative attention as Commissioner McCreevy said “we're here to talk about "weapons of mass destruction", as derivatives have come to be known”. He presented the areas of "transatlantic consensus” and said he is particularly happy that the US were also making efforts to achieve the same goals. The Commission set out its future actions to strengthen the safety of derivatives markets: to increase the transparency of the derivatives market, reduce counterparty and operational risk in trading and enhance market integrity and oversight. It will come forward with legislative proposals in 2010.
The AIFM Directive also continues to stir passion – perhaps most surprisingly from the ECB which urged the Commission “to continue the dialogue with its international partners, in particular the US, to ensure a globally coherent regulatory and supervisory framework”. However, the Financial Times reported that the ECB is acting clearly beyond its legal mandate, in protection of institutions with which the ECB does not even have direct relationship! The FSA published the independent impact assessment it commissioned and this showed that AIFM would have disproportionate effects on some parts of the investment industry – especially private equity and venture capital. However, AIMA signalled a new phase of engagement as it welcomed the parts of the Directive which relate to the G20 process but still argued that there are other elements of the Directive - such as those relating to leverage, depositaries and marketing among others - which have been poorly drafted.
The International Federation of Accountants (IFAC) announced its support for the goals expressed by G20 Leaders including the reform of executive compensation packages and the adoption of a single set of high-quality global accounting standards. It also seeks support for such standards for auditing and auditor independence. The Chairman of the IASB updated ECOFIN on reform of IAS 39: The new standard on classification and measurement responds directly to the call of the G20 Leaders to ‘reduce the complexity of accounting standards for financial instruments’. The IASB has been, and is committed to, working with the US Financial Accounting Standards Board (FASB) to reach a common approach on financial instruments.
Commissioner Kroes argued that consumers need robust competition more than ever before and stressed the importance of competition policy for consumers. It is not just about lowering prices for consumers, but also influencing their choice and quality. Commissioner Kuneva has also been a fierce advocate for the views of consumers and their representatives. Consumers need robust competition more than ever. Protectionism and slack enforcement would weaken the single market. The right solution is that we are maintaining competition enforcement.
Graham Bishop