Month in Brussels: Graham Bishop's Personal Overview of July 2012

The reverberations from the end-June European Council meetings continued to dominate attention.

The Euro Area Summit stated "We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area"; and “to break the vicious circle between banks and sovereigns, the Commission will present proposals for a single supervisory mechanism soon”; and “When an effective single supervisory mechanism is established … for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly..”. So Graham Bishop pointed out that direct bank re-capitalisation is in a strict sequence after `banking union’ is up and running, but may be only a part of `what is necessary’;
ECOFIN issued country-specific recommendations to all 27 Member States on the economic policies set out in their national reform programmes, and opinions on the fiscal policies presented in their stability and convergence programmes. As examples, Italy has accepted six points of recommended policy actions that are profound changes to economic management, and Spain has accepted eight equally profound recommendations. Graham Bishop argues that if either state were to request an EFSF/ESM `programme’, then these are already agreed as the necessary policy actions. The only extra dimension would be the degree of monitoring and surveillance to ensure the plans remain on track; and
ECB President Draghi spoke in London using the well-known phrase about “doing whatever it takes” but did not deliver any specific and immediate policy changes after the early August ECB Council meeting. However, he was explicit on one point “I have said at least twice – at a press conference, and on other occasions – that the current design of the ESM does not allow it to be recognised as a suitable counterparty. And we have a legal opinion of the ECB on this, which was issued way back in March 2011.” Graham Bishop said "that should have finally spiked the bazooka of an ESM banking licence and unlimited ECB loans to it so that Article 123 of the TFEU (no monetary financing of governments) can be breached wholesale."

(Graham Bishop believes that seems to raise the chances that #BishopBills will be seen more favourably)

As the full magnitude of the LIBOR scandal unfolds, the probity of the entire financial system is coming under examination so the Commission proposal on legislation to improve consumer protection in financial services was well timed. The package includes a proposal for a regulation on key information documents for packaged retail investment products (PRIPS), a revision of the Insurance Mediation Directive (IMD), and a proposal to boost protection for those who buy investment funds (UCITS). Commissioner Barnier said: "In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart…” A string of professional bodies rushed to endorse the thrust of the proposal: EBF, CFA Institute, EuroFinuse, FECIF, EFAMA and AILO amongst others.

The European Commission also moved quickly to propose EU-wide rules to tackle the LIBOR type of market abuse and close any regulatory loopholes. It addressed this market manipulation by adopting amendments to the proposals for a Regulation and a Directive on insider dealing and market manipulation, including criminal sanctions. The amendments will clearly prohibit the manipulation of benchmarks, including LIBOR and EURIBOR, and make such manipulation a criminal offence. Vice-President Viviane Reding, the EU's Justice Commissioner said: "Public confidence has taken a nosedive with the latest scandals about serious manipulations of lending rates by banks.” ECON’s Sharon Bowles said "Manipulation of Libor and other similar benchmarks is a seismic event in financial markets, which affects the pricing of many other financial instruments." FSA Chair Lord Turner identified some drivers of declining trust in the banking system and suggested better, more intense and more robust conduct supervision and enforcement, but action by the leadership of banks to improve culture and values is vital.

Following the European Council commitments, Banking Union has become a very hot topic and Commissioner Barnier asked “We want to break this link between States and their banks. With the future banking union, the situation will be different. There will be one European Supervisor to deal with ailing banks and financial crises. How are we going to build this Banking Union?” He answered his own question thus” stepping up the democratic support and control of the EU. We need an integrated Financial Union with enhanced democratic control.”

Graham Bishop was somewhat surprised that UK Treasury Minister Mark Hoban welcomed the decisions taken by the Eurogroup and the European Council to establish a banking union, and said that the crisis had shown why a banking union is a necessary part of monetary and fiscal union.
Graham Bishop said "Clearly, this is a debate that is just getting underway and the results will re-shape the financial face of Europe – and probably the political face as well. All participants in EU financial markets will have to pay very careful attention to these forces – including ones from the drive to democracy."

Graham Bishop

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Notes for Editors

Graham Bishop is renowned as a one-man think tank, with the vision and courage to propose radical ideas, yet ground them in a mastery of the technical details of the financial system. His influence at the meeting point of politics, economics and finance has built up particularly since the early 1990s, when he pointed out to the Maastricht Treaty negotiators that government debt would have a fundamentally different quality in a common currency. He played a key role in designing the changeover to the euro, both of national currencies and of Europe’s capital markets. His influence continues to this day - as the Rapporteur of ELEC’s insightful plan for a Euro-T-bill Fund, which would have profound political implications for the euro area, and for Britain, if implemented.

Graham now approaches his 80th ’Brussels for Breakfast’ meeting in the City of London - attended by a wide array of senior officials and government affairs specialists from major financial institutions.