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Graham Bishop’s Overview
The Greek crisis dominated the news flow in March and we included quite a number of articles about the economic situation even though it seems outside our sharp focus on financial services regulation in the EU. However, there will be spill-overs in a number of areas. Most obviously, the probity of naked CDS trading on sovereign debt rose to prominence – but why only “sovereign”? However, part of the political urgency to solve the crisis stemmed from fears that a significant part of the EU banking system could be undermined by losses from a default.
Twenty years ago when the design of EMU was being negotiated, I published several papers on the role of “market discipline” in restraining excessive public deficits, rather than relying solely on ECOFIN to provide the necessary discipline. In part, my proposals were designed to ensure that a reckless state could not blackmail the EU into a bail-out by threatening to bring down the financial system. I plan to summarise and refresh the analysis next month and re-publish the original papers as a contribution to the quest for a process that can protect the EU and can be enacted without the complexities of a Treaty change.
Both Commission and Parliament held events that produced a flurry of comments on the difficulties of providing “resolution” for a cross-border banking group. Bank of England Deputy Governor Paul Tucker suggested deploying a super special resolution framework that permitted the authorities, on a rapid timetable, to haircut uninsured creditors in a going concern. The Basel committee re-issued its 2009 recommendations covering a strengthening of national resolution powers and their cross-border implementation; Firm-specific contingency planning (effectively a living will) and reducing contagion risk through mechanisms such as netting and collateralisation. The IMF published on the need for any framework to be consistent with the broad objectives of the single market and to allow for the consolidation and rationalisation of banks across borders.
The derivatives market continued to claim much attention as the FT reported that Germany and France had called on the EU to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading. A growing European consensus on the need for tougher regulation of CDS trading was reflected by Lord Turner, Chairman of the UK FSA, who warned that naked trading in corporate CDSs could also force companies into default. ECON debated the Langen report and argued for a clear distinction between derivative use by companies and by financial institutions
On the good news side, CEIOPS published European-wide stress test findings for the insurance sector. The exercise included 28 large and important European insurance groups, covering above 60 per cent of premiums of the European insurance market. The results of the exercise indicate that large, important European insurance groups would remain resilient even in severe scenarios. In all scenarios, the aggregated level of available capital exceeded the regulatory requirements. Under Solvency II the regulatory solvency requirements will be more focussed on a consistent measurement of assets and liabilities thus making future European-wide stress tests more comparable.
The Spanish Presidency published the latest AIFMD compromise text, and felt sufficiently confident that it forecast a QMV to be emerging for it. But that was so clear that the Presidency switched the topic off the ECOFIN agenda and postponed it to after the probable date of the UK General Election presumably to spare the UK the humiliation of publicly losing! ECON is expected to adopt its report in early April in view of the final adoption by the Plenary at first reading in June or July. However, the US waded into the debate when US Treasury secretary Geithner delivered a blunt warning that EU plans to regulate the hedge fund and private equity industries could cause a transatlantic rift by discriminating against US groups.
Corporate governance emerged as a flavour of the month as Basel issued some principles commenting that the crisis has highlighted the critical importance of sound corporate governance for banking organisations. They included yet another call to re-inforce the role of the board suggesting that for example the board should have adequate knowledge and experience! The Commission is preparing a report that will most likely become a consultation on corporate governance in the financial sector. It is intended for publication on May 2010, with a legislative proposal almost certain to follow in 2011. The Commission is looking at the usual key areas but also including the role of the external auditors as no alert was given by auditors on a bank’s particular situation before it collapsed. Corporate governance is high on the FSA’s radar and it has published a Consultation Paper outlining their latest thinking on this subject – with the approved persons’ regime as a vital element in ensuring that firms are well governed.
The Luxembourg Financial Industry Federation published a financial sector code of conduct, noting that sector practitioners are also subject to an ethical obligation, if not self-regulation. There is a guiding thread common to its code: honesty, fairness, loyalty towards the customer, respect for the integrity of markets, competence, transparency, and, finally, respect for rules. Luxembourg and its financial centre reiterated their adherence to a business ethic that can be simply described as “respect for others”. A few months ago, the Dutch financial community published a similar moral statement. Perhaps smaller communities have a greater sense of social cohesion.
Graham Bishop