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On the last day of May, the European Commission published more than 1500 pages of analysis and recommendation that marked the full emergence of a political union of the euro area. But markets and media failed even to notice it, let alone recognise its importance. That might not matter too much – except that the commentary about the loans to Spain completely failed to understand that Spain is effectively in a Programme – just as all euro area members are. The only difference is the degree of surveillance. The way forward is analysed in my new pamphlet: `A timeline for sequencing the grand euro strategy – No taboos’ View
The next phase in this process was debated by ECON which said the European Commission should have more control over fiscal policy in Member States, but not the free rein it asked for - stating its position on the economic governance "two pack". Bruegel argued that Member States are going to be subject to strong pressures for change - a first clear test of the extent to which Member States have internalised the need for radical change following the debt crisis.
This leads straight on to the issue of a ’banking union’ - debated by Bruegel thinkers, Pisani-Ferry and Véron. It was discussed by EU leaders at their last meeting and has been endorsed by the European institutions. Banks massively hold government bonds issued by their sovereign, and those sovereigns are solely responsible for bailing out banks headquartered on their territory. This creates a potential for vicious circles and even self-fulfilling crises. What is a banking union? Assigning to the European level the responsibility for deposit insurance, bank supervision and crisis resolution. But in this author’s view, an effective banking union could be limited to the 30-40 banks with the potential to spread contagion across borders, leaving the other 8250ish banks alone.
How might this play in Germany? The new BaFin President, Dr Elke König, said: “Let us be clear about one thing: there is no alternative to the European System of Financial Supervisors. Europe is a common economic area for which we will in due course need a common rule book.”
Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare: Oonagh McDonald’s new book gives a fascinating insight into the machinations that converted a US political ideology into global financial turmoil as almost half of the outstanding US mortgages were subprime by 2008. Where were the regulators? Where was the political oversight? European politicians should study this cautionary tale as they tinker with the banking system for social purposes.
CRD IV took another step forward when the Danish Presidency secured unanimous agreement on Council’s negotiating position with Parliament – despite a 10-page UK Treasury document outlining Britain’s reservations. But Britain’s support seemed to melt away at the vital moment. A sign of waning influence? Looking ahead, the BBA asked “if banks now face a risk of being Vickered, Volckered and Liikanened as well? And will the regulators ever recognise the potential cumulative impact of their individual approaches?”
ESMA’s Steven Maijoor spoke about the development of a single rulebook and supervisory convergence flowing from its new role as EU securities markets’ standard-setter, thereby reducing the risk of regulatory arbitrage. Verena Ross extended that theme to direct supervision. Beyond the supervisory convergence agenda, the legislators have gone further in some areas and have placed significant cross-EU market players under the direct supervision of ESMA as European authority. Last year, ESMA became the sole supervisory authority for CRAs in the EU. [A template for developing a banking union?]. Another template for European-level actions is the European Covered Bond Council (ECBC) – which will implement the Covered Bond Label infrastructure this year - responding to a market-wide request for improved standards and increased transparency in the European covered bond market. The Label has been developed by the European issuer community, working in close cooperation with investors and regulators, and in consultation with all major stakeholders. Regulatory preferential treatment for covered bonds in the EU should be available.
On insurance, Commissioner Barnier said he was convinced that since insurers are a force for stability and continuity on financial markets, and especially as they can invest for the long term, they have a key role to play in getting Europe back on track for sustainable growth. He elaborated on the three major regulatory projects that are currently underway: Solvency II; the Directive on Institutions for Occupational Retirement Provision (IORPs) and the Insurance Mediation Directive (IMD). “I hope the European Parliament, whose role is essential in this matter, will soon reach a balanced agreement with the Council on the issue of long-term guarantees. We are doing our utmost to ensure that the agreement contains various well-tailored solutions to address the concerns expressed by the insurance sector and to avoid certain markets or insurers being penalised by the new system.” He went on to say: “Let me be very clear: contrary to reports in the press, we do not intend to apply all the Solvency II rules to occupational pensions institutions”, However, he argued, “the IMD Directive must include within its scope direct selling of insurance. We think that each policy-holder should be given the same level of information and protection, wherever they purchase their insurance guarantee.”
Rising numbers of insurers believe the industry will miss the January 2014 compliance deadline for Solvency II, according to a survey conducted by the Economist Intelligence Unit/Deloitte. The survey of 60 UK-based insurers found that 37 per cent fear that the industry will fail to meet the compliance deadline. So the Commission bowed to the reality with a targeted proposal to move the implementation date of Solvency II to 30 June 2013, and the application date by companies to 1 January 2014. But Solvency II may also pose difficulties to fund managers, and State Street Global Services has warned that it could force asset managers to disclose their investment strategies "inadvertently" if Brussels adopts a 'look-through' approach for pooled vehicles. The current third pillar of the Solvency II framework requires asset managers to provide a much more granular level of reporting for pooled funds like mutual funds, hedge funds and securitised products.
Asset management – according to Commissioner Barnier - is the key to intelligent financial regulation and he hopes two proposals for EU funds - venture capital and social entrepreneurship - can be adopted as early as July. But he is also focusing on shadow banking regulation: “We must ensure that the new rules we put in place will not have the effect of encouraging certain banking activities to migrate to the unregulated sector; and we must be careful not to penalise players who, in this shadow banking system, play an important role in financing the real economy.” AIMA reported a survey finding that the increase in institutional investment has led to more thorough due diligence and greater demands by investors for transparency, with 90 per cent of respondents reporting an increased demand for due diligence since 2008. So a market response already.
ISDA compared derivative reporting under US GAAP and IFRS to assesstheir impact on the new Basel III Leverage Ratio. A better understanding of the terminology and the way in which derivatives are traded, managed and settled provides an understanding of why US GAAP accounting standard-setters have consistently agreed to reporting derivatives net rather than gross on the balance sheet, and why this differs from reporting under IFRS. ISDA believes that net presentation, in accordance with US GAAP, provides the most faithful representation of an entity’s financial position, solvency, and its exposure to credit and liquidity risk. Michel Prada, Chairman of the IFRS Trustees, told IOSCO that companies in more than 100 countries are required or permitted to use IFRSs. More than two-thirds of G20 countries are required to use IFRSs and almost half of Global Fortune 500 companies now report using IFRSs. Footnote: The IASB welcomed the Pan African Federation of Accountants' push for its 39 constituent members to adopt IFRSs, including for SMEs.
Graham Bishop