The build-up to the G20 meeting in Toronto was dominated by warnings about the dire economic impact of simultaneously raising capital and liquidity requirements for banks. But the BIS gave a pre-emptive counter blast to bankers' 'doomsday scenarios' and their own impact assessment is now imminent. Nonetheless, the G20 Summit Declaration paved the way to further delay of reforms as it noted that the standards would be “phased in over a time frame that is consistent with sustained recovery and limits market disruption, with the aim of implementation by end-2012.” The FSB is to report this October on recommendations to strengthen oversight and supervision, whilst it is to develop concrete policy recommendations by the time of the Seoul Summit in November. However, the FSB itself reported that it only “hopes” the Basel Committee will deliver their new standards in time.

G20 agreed that the financial sector should make a “fair and substantial contribution”, but its members could not agree on a common policy approach despite the pressure from the EU - which agreed at its own mid-June Summit that the Commission would report back in October on a system of levies and taxes. The new UK Government acted in its first budget to impose a bank balance sheet levy and both France and Germany were stated to have committed to a similar system. At a time of declining loan demand – or is it supply? – the logic of removing capital from banks seems dubious as that capital will not be available to be leveraged  (by the eventually-agreed “leverage ratio”) into new loans.

However, the EU was also able to report to G20 that it would now run stress tests on its leading banks in an effort to allay fears about the financial health of Europe. But the limited scale - both by number of banks and limited stresses – immediately raised a storm of criticism. It would seem bizarre if even current market yields of EU government bonds were not used as the starting point for the additional stresses. Any absence of full transparency will be assumed by markets to be an attempt to hide an unpalatable truth – thus producing the exact opposite of market calming!

The recent market turbulence has confirmed the need for the Commission to move swiftly in completing the financial reforms to ensure a safe and sound European financial system and it committed itself to table the remaining proposals needed to implement fully the EU’s G20 Commitments in the next six to nine months. The list is breathtakingly lengthy and includes action on derivatives, short selling, CDS, MiFID/transparency, depositor/investor protection schemes, PRIPS, MAD, CRD IV, bank resolution and accounting standards.

Whatever lies ahead, CRD III is already progressing through the legislative process and the European Parliament voted to cap bankers' bonuses after agreeing with Council. Bonus-like pensions will also be covered.  Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the underlying strength of the bank in an attempt to create an identity of long term interests of significant employees and the bank itself.

The Commission launched several major consultations:

€ Derivatives and Market Infrastructures: In substance, the Commission's future proposal will focus on four points: Reducing counterparty credit risk by mandating CCP-clearing where possible; Increasing transparency by mandatory reporting to trade repositories; Ensuring safe and sound CCPs through stringent and harmonised organisational, conduct of business and prudential requirements; and improving efficiency in the EU post-trading market by removing barriers preventing interoperability between CCPs while preserving the safety of them.

€ Short selling and Credit Default Swaps: The intention of the measures is to: ensure that Member States have the power to act to reduce systemic risks and risks to financial stability and market integrity arising from short selling and Credit Default Swaps; facilitate co-ordination between Member States and the European Securities Markets Authority (ESMA) in emergency situations; increase transparency on the short positions held by investors; and reduce settlement risks linked with uncovered or naked short selling. (Sarkozy and Merkel had just urged the Commission to accelerate and intensify work on the regulation of financial markets and to explore the possibility of EU wide ban on short selling.)

€ Green Paper on corporate governance in financial institutions. The Commission wants to ensure that the interests of consumers and other stakeholders are better taken into account, businesses are managed in a more sustainable way and bankruptcy risks are reduced in the longer term. It covers board functioning to enhance their supervision of senior management; risk culture at all levels of a financial institution; the involvement of shareholders, financial supervisors and external auditors in corporate governance matters; and remuneration policies.

AIFMD: The European Parliament is now expected to vote on new, tighter regulation on hedge funds in September, two months later than expected. The ECON Rapporteur said that 'the Spanish Presidency of the EU was not able to present a suitable compromise text agreeable to all sides.' 'I have now met with the Belgian Minister of finance and the discussions were fruitful. Work will continue during the Belgian presidency and I am confident that an agreement will be reached in time for a September vote'. According to one MEP involved in the trialogue, Member States are defending national interests and do not provide constructive solutions to build consensus. 

IASB and FASB issued a statement on their convergence work and are in the process of developing a modified strategy to take account of objections and it retains the target completion date of June 2011 for many of the projects identified. The target completion dates for a few projects have extended into the second half of 2011.

Graham Bishop