03 October 2013

EIM Financial September 2013

Perhaps the most significant aspect for financial markets is the growing recognition that the special regulatory treatment given to government debt must be changed – as this author has advocated since 1989!

The shape of the ECB’s Asset Quality Review (AQR) is now crystallising. It is certainly ambitious, but it does not expect any disasters, and any one-off national re-caps of banks will not break EU budget rules. So the furore over the SRM seems ever more irrelevant for the eurozone in the next year or so. Nonetheless, that debate will shape which non-euro states decide to join Banking Union. The moment of decision is getting closer. Perhaps the most significant aspect for financial markets is the growing recognition that the special regulatory treatment given to government debt must be changed – as this author has advocated since 1989! 

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Berlin mulls way to Banking Union without Treaty change: After the meeting in Vilnius, Reuters reported that, according to EU officials, Germany was now working on a plan that would allow the completion of a eurozone Banking Union without changing existing EU law, potentially removing a major hurdle to finishing the most ambitious EU project since the start of the euro. In Berlin, a senior official said the government was thinking about many scenarios, not just one.

Plenary Session: Green light for single supervisor for banks: MEPs gave their green light to the EU bank supervision system. They also pushed for a decision-making model for the system which would allow non-eurozone countries to take part as equal partners. MEPs strengthened the system's transparency and accountability and tasked the European Banking Authority to develop supervisory practices which national bank supervisors should follow. Declaration by the Presidents of the EP and the ECB on the SSM: "We, the Presidents of the European Parliament and of the European Central Bank, hereby declare our full support for the draft text of the Inter-institutional Agreement between the EP and the ECB on cooperation on procedures related to the Single Supervisory Mechanism (SSM). The draft Inter-institutional Agreement provides for strong parliamentary oversight of the ECB’s supervisory tasks through regular exchanges of views with Parliament's responsible committee, confidential oral discussions with the Bureau of that committee, and further access to information, including to a record of proceedings of the Supervisory Board.”

ECB/Draghi: One barrier to bank lending at present is lack of transparency over bank balance sheets. Having a single European supervisor will help address this, as we plan to conduct a comprehensive balance sheet assessment of banks we directly supervise. Another barrier to bank lending is low investor confidence, which is in part created by different rules for banks across jurisdictions and a lack of comparability. The future European supervisor will also help here, not least by leading to harmonised treatment across the banks it supervises – for example, of loan classification, forbearance and provisioning.

ECB/Asmussen: Towards a banking union – The state of play from the ECB's perspective:  European Banking Union is a prerequisite for a genuinely integrated European financial market; it is crucial for the central bank and it ensures that monetary policy signals can be properly transmitted throughout the euro area. Once the legislative process is completed, we will begin to recruit experts and managers for the common banking supervision. I assume that the supervisory team will count about 1,000 employees. Our internal preparations focus on four priorities, including:

1. Based on this comprehensive overview of the banking system, we will then decide which banks will be supervised directly by the ECB and currently expect approximately 130 banks and banking groups. The assets of these banks account for about 85 per cent of the assets of the euro area.
2. A unified supervisory model. This regulatory model clarifies how the different levels - national and European - will work together. The goal is to create a team for each bank that falls under our direct supervision that consists of both national and European supervisors in order to benefit optimally from the know-how on both sides.
3. A comprehensive evaluation of those banks which will be put under the direct supervision of the ECB. This Comprehensive Assessment encompasses a risk assessment, an asset quality review and a stress test.

A common banking supervision must be democratically legitimised and controlled. The common banking supervision is therefore accountable to the citizens of Europe. We are in the process of working out the optimal design of this new accountability together with the European Parliament. But who will actually decide that a bank is no longer viable? In my opinion, such a decision should lie solely with the banking supervisor and therefore should be taken in future by the ECB.

Bruegel/Sapir & Wolff: The neglected side of Banking Union - Reshaping Europe's financial system: How Europe's financial system could and should be reshaped… The EU, and in particular the euro area, need to develop a genuine cross-border equity and corporate bond market. The development of these markets will require further harmonisation of corporate governance, insolvency legislation and taxation. This would reduce the heavy reliance of the EU economy on bank funding. The eventual introduction of strict limits on bank exposure to sovereign borrowers, or risk weights attached to government bonds, are also important for reducing the link between banks and sovereigns.

EBF: Positioning on the principles underlying the Single Resolution Mechanism: EBF Members believe that the Board should be given a strong legal basis, if deemed necessary by a treaty change. The ultimate decision-maker in the SRM should be independent, but accountable through democratic oversight and answerable to legal proceedings and rights of appeal. The level of outstanding senior unsecured long-term debt currently held by banks - around €1.1 trillion - is 20 times the size proposed for the SRF. Bail-in would absorb all or most of the cost of a bank failure in most circumstances. The size of the SRF should be limited in line with a targeted purpose to provide financing to meet operational costs of resolution.

Bundesbank/Weidmann: Banking supervision and regulation - What action does the Bundesbank consider necessary? ”We need to loosen the close ties between banks and governments. In my view, there are two main components to this second approach: first, better rules restricting banks’ balance sheet risk arising from government debt holdings and, second, the banking union. We can only achieve this if we stop giving government debt preferential regulatory treatment over other loans or securities. Government debt should therefore be backed with a level of capital which adequately reflects the risks it carries and caps should be imposed on bank sovereign debt holdings.”

© Graham Bishop