Bloomberg: Brexit financial-market threat leads EU Watchdogs to step up

05 October 2018

After months listening to the UK warn about the risks posed by a no-deal Brexit, European Union financial regulators are now stepping up plans to avert a market meltdown.

Daniele Nouy, the European Central Bank’s head of supervision, set an assuring tone on Thursday when she said the ECB is “ready to help ensure a smooth Brexit -- no matter the outcome of the political negotiations.” And she’s not alone. The EU’s top markets cop called on Brussels to guarantee that the bloc’s banks don’t lose vital access to London’s clearinghouses in a disorderly divorce.

That’s a change, because up to now the EU has largely said that preparing for a cliff-edge Brexit, with no transition to give governments and financial firms time to adjust, is the industry’s responsibility. Nouy and Steven Maijoor, chairman of the European Securities and Markets Authority, signaled that EU institutions would take action if needed. [...]

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Speech by ECB's Danièle Nouy: European supervision in the global village

[...]To build on the achievements of the past four years, we need to start by acknowledging that the single rulebook is not as harmonised as we would like it to be.

For a start, it would be beneficial to further reduce the discretion given to national supervisors when they apply European law. This leeway is enshrined in the 167 options and national discretions (ONDs) provided for in the CRR, CRD IV and delegated acts. Some of these ONDs lie in the hands of the supervisors themselves. Thus, we have agreed to exercise them in the same manner across the euro area. Other ONDs lie in the hands of national legislators, though. So it is up to them to harmonise the remaining ones and thus create a more European rulebook for banks.

On top of that, there are important tasks which are still carried out under national law. Fit and proper assessments for bank managers are one example. Regulating such things at European level would take us another step towards a truly European banking sector.

In the future, we should also strive for a harmonised legal framework right from the start. European legislators should rely more on regulations and less on directives, for one reason: directives need to be transposed into national law, a process which most of the time results in uneven outcomes. Regulations, on the other hand, apply directly. They can bring us closer to our shared goal of achieving a level playing field for all European banks.

But we have to look beyond the borders of Europe, given our role as a node between the regional and global level. And at global level, we bring the European perspective to international bodies, from the Financial Stability Board to the Basel Committee on Banking Supervision. We can make regional issues heard globally. We make sure the voices of all our members, even the smaller ones, are heard in the international fora.

But to keep on doing so, we must also show that Europe is ready to uphold the commitments it has made on the global stage. It must aim to fully and faithfully transpose international agreements into European legislation – ideally through regulations, as I just mentioned. This includes Basel III. We must be wary of any watering-down of key Basel III commitments. I am wary.

Take the fundamental review of the trading book as an example. This review is a crucial attempt to address the shortcomings of the previous Basel market risk framework. As the trilogues on the banking package proceed, we must keep this in mind. If the Council proposal were to prevail in the negotiations with the Parliament, the new market risk framework would only be used as a basis for reporting requirements, not as a basis for capital requirements, as foreseen in the Basel agreement.

And this is not the only example. Another one concerns the net stable funding ratio. Current proposals would lower the required stable funding for short-term secured lending to financial customers, as well as for assets used as collateral to issue covered bonds.

These deviations are a problem. But in the end, the problem goes beyond individual measures. The more our memory of the crisis fades, the greater the temptation will be to de-regulate once again. I urge legislators to resist such temptations and continue on the path of reform. Backtracking will only take us back to where we came from – a devastating financial crisis.

The road ahead: what remains to be done and key priorities for the near future

Of course, supervisors will not stand idly by, either. Our work must, and will, move forward on several fronts. Just to mention a few, among other priorities, we will continue our work on profitability, non-performing loans, the targeted review of internal models, governance and liquidity. We will also be ready to help ensure a smooth Brexit, no matter the outcome of the political negotiations. And we will prepare for newcomers; this means banks that may choose to relocate to the banking union, or countries that may want to join through close cooperation.

But one thing should be clear: crises cannot be ruled out. Thus, we need to further enhance our crisis management framework. We can start with early intervention measures. Here, we have to deal with an overlap between the early intervention measures provided for in the BRRD and supervisory measures provided for in the CRD IV and the SSM Regulation. This overlap hampers the use of these measures; it should be removed.

Further, we should align the EU crisis management framework and national insolvency laws. Currently, a bank that is declared failing or likely to fail under the BRRD and the SRM Regulation does not always meet the conditions that would make it subject to national insolvency proceedings. In fact, under national legislation present and actual illiquidity is usually required if insolvency proceedings are to get under way. At European level, not only actual but even likely illiquidity can be grounds for declaring a bank failing or likely to fail.

So, in cases where the Single Resolution Board decides that resolving a bank declared failing or likely to fail by the SSM is not in the public interest and thus hands it over to the national level, this gap between EU and national laws could put banks in a limbo.

And then, the last item on my list is that, we should continue to work towards completing the banking union.


Making the European Stability Mechanism the backstop for the Single Resolution Fund will help to further ensure the safety of the banking system in times of crisis. And of course, completing the banking union also means continuing to work towards a European deposit insurance scheme as its third pillar. [...]

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