Month in Brussels - GB's Personal Overview of April 2013
Key components of the repair of the euro fell into place in April, but attention is now beginning to swing to the Eighth Parliament and next Commission as the Seventh Parliament will dissolve within twelve months. The Single Supervisory Mechanism and European Banking Authority measures were enacted – though requiring final ratifications by Parliament and Council before they come into force. Only then can the ECB Supervisory Board be created and the technical details of managing the new supervisory system filled in.
The ECB’s ‘Financial Integration’ and the Commission’s ‘Stability and Integration’ Reports were published. Some concerns surfaced. The original three-legged structure – Single Supervisory System (SSM) + Single Resolution Mechanism (SRM) + Single Deposit Guarantee System (DGS) - has already had one leg chopped off as the pan-eurozone DGS has been shelved. Germany has now suggested that the SRM may need a Treaty change to have full legal strength and the SSM mechanics are being questioned.
Little attention has been given to an aspect of the Regulations on the SSM and EBA: they have created two classes of bank in the EU - European and national. The natural consequences – immediate and medium-term - should be followed through rapidly to understand the implications for banks, the financial system and public finances. This risky, game-changing moment is now set to occur at some stage within the next year as the ECB takes over day-to-day supervision. That action gives a one-off opportunity to correct these perceptions, or actual errors.
The accounting treatment of expected losses is a well-known issue so it should be open to the ECB to announce well in advance the supervisory rules that it will follow on impairment when it conducts the Asset Quality Review (AQR) of assets that it will take under its supervision. That gives bank management an opportunity to inform shareholders – again, in advance - of the potential additional ‘special charges’ against profits that will be reported. This process would be quite distinct from a stress test as that simply measures what will happen to ‘reported’ losses under particular economic scenarios. The AQR must go to the heart of the problem: the belief that there are heavy, hidden losses that threaten the stability of some banks.
Given the transition to a single rule book in financial services across the EU and the EU legislator's willingness to have "all financial markets, products and actors covered by regulation", it is increasingly important to ensure that legislation fits together seamlessly. So ECON announced a consultation that will feed into a programme of reflection to determine future priorities for the remainder of this mandate and to inform the priorities for the incoming Eighth Parliament in 2014. The next Commission/Parliament has much work to do but the implications that will flow from the ECB’s Asset Quality Review will come far more rapidly.
Graham Bishop
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© Copyright Graham Bishop, 7th May 2013