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16 December 2009

December 2009 - with Podcast

The EU is continuing to move with astonishing rapidity towards a new regulatory regime for financial services. The European Council formally welcomed ‘the rapid and determined action taken by’ ECOFIN. But the ‘general approach’ has yet to be agreed by the European Parliament.

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 Graham Bishop’s personal overview

The EU is continuing to move with astonishing rapidity towards a new regulatory regime for financial services. A year ago, the De Larosière Group was appointed to consider the issues: on December 10/11, the European Council formally welcomed ‘the rapid and determined action taken by’ ECOFIN. However, the ‘general approach’ has yet to be agreed by the co-legislator - the European Parliament – and they have indicated that they do not accept the watering down of the Commission proposal. Indeed the Parliament may want to go further towards a more European solution.
The ECOFIN meeting on 2nd December agreed several other topics apart from the new supervisory arrangements and these included welcoming the Commission’s communication on derivatives markets that called for a comprehensive policy on OTC derivatives – though this author still wonders if the degree of concentration of exposure is such that these measures can resolve the inter-connectedness problem.  ECOFIN also encouraged banks and payment institutions to implement the SEPA Direct Debit, whilst pushing the public authorities to adopt SEPA fully.
Across the Atlantic, the US House of Representatives approved a new legislation to modernize America’s financial rules. The “Wall Street Reform and Consumer Protection Act” created a Financial Stability Oversight Council for systemic risks, set reforms for the OTC Derivative Markets, introduced a 5% retention rate and addressed the too-big-to-fail issue by introducing a Systemic Dissolution Fund. But the US Treasury’s Sobel warned about the risk of regulatory arbitrage and called for closer cooperation of national regulators, in particular on CRAs, Hedge Funds, OTC derivatives, and Accounting.
CEBS finished the year with a flurry of consultations and guidelines. These included revisions on stress testing – given the changes in BCBS principles. Revisions to the large exposures regime were published, and guidelines on liquidity made clear that a bank must be able to withstand at least a month’s ‘liquidity stresses’.
The AIFM continued to generate much heated debate. On the one hand, the Swedish Presidency published a second revised text and exuded quiet confidence that ‘there is a high degree of convergence of views on the rest of the text’ apart from those on Depositary, Valuation, Remuneration, and Third country issues.
EP Rapporteur Gauzes produced his report and said that, since many things still had to be discussed, this was still not a perfect finalized document. But many on the left want more regulation whilst the right fear such steps will stifle the industry or force it out of the EU. The Financial Future Forum responded saying it has to be debated carefully as the devil is (as always!) in the detail. The House of Lords EU Committee is concerned that the directive does not fulfil global regulatory arrangements. It also considers the compromise proposals of the Swedish Presidency to be a good agreement, moving towards a directive more compatible with the emerging proposals in the US and the rest of the G20.
 However, the most trenchant criticisms still seem to come from the private equity industry. BVCA said 'The disclosure requirement put forward by the Committee on Economic and Monetary Affairs worsens a deeply defective directive’. They went on to describe the problems faced by such funds in some detail.
Accounting issues never seem to be out of the headlines for long and CESR Chairman Wymersch told ECON that the EU is not doing very well because EU and US standards are diverging and this is creating a huge gap. (He added that it was not only in relation to accountancy standards, but also on AIFM and in CRA.) EFRAG thinks that the periodic review of the IASCF (IASC Foundation) Constitution is important but the convergence objective should be removed from the constitution at this stage, because IFRSs have now achieved a sufficient degree of acceptance for them to be fully independent of national standards. The emphasis needs to be on the adoption of high quality global standards.Underlining that, CESR gatheredEnforcers’ of IFRS from 33 countries for a global dialogue to underpin investor’s confidence. On the Constitution Review, Véron argued that a broader strategic readjustment on the part of the IASCF is necessary if the Foundation hopes to regain the support of the global investment community, its most crucial group of stakeholders. The Foundation must make itself more responsive and accountable to the investment community, a requirement that has become more urgent due to the crisis.
The State Aid Scoreboard showed strong increase of aid in response to financial crisis: Total crisis support made available by Member States and approved by the Commission in 2008 was € 3361 billion. The nominal amount of crisis support actually implemented by Member States in 2008 was much lower and stood at € 958 billion. The state aid element of this amount is estimated at € 212.2 billion or 1.7% of EU-27 GDP.
Competition Commissioner Kroes made some valedictory comments on five years of sector and anti-trust inquiries in retail banking sector. The crisis showed that the whole financial sector was not functioning as it should. There is a fragmented market; concentrations are harming consumers in certain areas; and self-regulation generally is not fulfilling its potential.  On CRAs, she was shocked to learn, for example, that in 2008 these agencies gave AAA ratings to a mere twelve companies worldwide; at the same time they gave AAA rating to 64,000 financial products. She believes that many banks are realising they need a greater focus on retail banking, The crisis also underlined the social importance of financial institutions, so the Commission must make sure that each citizen in Europe has access to basic banking services. View full publication

© Graham Bishop

Documents associated with this article

MiB - December issue.doc

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