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05 October 2015

Deepening EMU – Round-up of Key Events – September 2015

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The presentation of the Action Plan for building a Capital Markets Union and the State of the Union debate were the main events in the European Parliament. The ECB's efforts as the single supervisor clash with national laws: Draghi called for a common approach in the EU to writing off bank debt.



September was marked by the presentation of the Action Plan for building a Capital Markets Union by Commissioner Jonathan Hill, who also wrote a comment in the FT explaining why a stronger capital markets union for Europe is needed. For those seeking a comprehensive view on the CMU, Graham Bishop shared his vision in several articles published by Financial World (“What is CMU?” and “It’s time for a 29th regime”) and some comments in Open Markets (“Europe’s search for capital”).

ECB's Mersch enumerated the medium to long-term priorities of CMU for the ECB and the Eurosystem at the Eurofi conference , stating that union needs to be pursued through a higher level of ambition to achieve deeper financial integration. Commissioner Hill had previously wooed the banking sector at the EBF annual conference, saying that the CMU didn’t represent a challenge for European banks but “a complement”: the EBF welcomed the presentation of the CMU Action Plan, arguing that it “puts Europe on track towards growth.” Nevertheless, the ACCA was more prudent and warned against “hasty design or poor implementation.”

ESMA readied some of the most important pieces of post-crisis financial regulation: MiFID II, MAR, and CSDR. Its Chair -Steven Maijoor- also delivered a statement on ESMA's achievementsover the last year to the European Parliament’s ECON.

IOSCO published its review of Implementation of Incentive Alignment Recommendations for Securitisation, responding to a request by the G20 leaders in 2013.  It also issued the progress report on the CCP Workplan that the BCBS, CPMI, FSB and IOSCO are conducting; a significant work whose outcome should be considered for the inclusion of any additional requirements in EMIR, as the ECB stated in its response to the European Commission’s consultation on the review of the EMIR.  The central bank also published its Standards for the use of central counterparties in Eurosystem foreign reserve management operations. In the meanwhile, EU regulators may align one of its key rules for regulating financial derivatives with US practise to help end a lengthy dispute, according to Reuters.

Reuters informed that the Libor’s shadow is still large, reporting that twelve European banks agreed a $1.9 billion settlement following investor allegations they abused their market-making position in the CDS market.

Finally, CEPS analysed the ECRI Statistical Package 2015, revealing that this is the sixth year of contraction in the European private credit markets, despite a stabilisation in the housing market.


ECB President Mario Draghi discussed the latest economic developments in the EU and the proposals presented in the Five Presidents’ Report at the ECON meeting, and revealed that most big euro zone banks have capital way above requirement, as the ECB’s Single Supervisory Mechanism found out after taking over the supervision of large eurozone banks late last year. Draghi dismissed concerns from some national central banks were asking institutions to set aside too much capital to cover potential losses risks so strangling lending and hampering the eurozone's economic recovery. However, research from JPMorgan showed that “harmonisation” efforts could result in a need for €26bn in extra capital by 35 of Europe’s biggest banks.

The efforts towards Banking Union clash with national banking laws as shown in an opinion issued by the ECB, in which it claimed that national laws hamper ECB's work as the single supervisor and called for a common approach in the European Union to writing off bank debt so creditors like senior bondholders - and not taxpayers - were called on to shore up the banks in the event of a bail-out. But these new rules, which come into effect on January 1st next year, are making EU regulators rush to complete Greek’s bank restructuring in less than four months to keep their promise of not touching deposits.

In line with these events, the EBA consulted on a harmonised definition of default, while AFME published a new model clause that creates harmonisation for contractual recognition of bail-in.

Global banking supervision was also on focus, with IASB's Chairman Hoogervorst saying that the forward-looking expected loss model in the new IFRS9, which kicks off in 2018, should provide investors with better insight into loan loss risks. For its part, the new TLAC standard is causing G-SIBs watchdogs important headaches, because it may force regulators in all the countries where the largest banks operate to agree which of them should be more exposed to the bank being caught short if a disaster occurs, given that TLAC is expected to ensure global financial stability by making global systemically important banks have sufficient capacity to absorb losses. The EBA and the BCBS published their respective Basel III monitoring results, with data as of 31 December 2014 showing that all large internationally active banks meet the Basel III risk-based capital minimum requirements. 

These new rules won’t be applied to non-banks, according to ECB’s Noyer, who said at a central bank’s meeting that duplicating bank rules for shadow banks could cause all investors to take the same positions at the same time, leading to a "one way" market of violent moves in one direction.

The FT warned that EU regulators risk causing unnecessary pain to European investment banks, with the balance of power in global investment banking shifting to the US banking sector. Nowhere is that truer than in the UK, according to the financial newspaper, because of the PRA’s incoming rules on ringfencing and the FCA’s new regulatory regime for top bank staff, which may result in an increased risk of legal action for banks and an extensive overhaul to comply with the new rules.

Asset Management

IOSCO published its Final Report on the Peer Review of Regulation of Money Market Funds, while EIOPA held its third Public Event on Personal Pensions to gather insights that will help to prepare EIOPA’s final advice to the European Commission on the introduction of a standardised Pan-European Personal Pension product(PEPP).


EIOPA issued the second set of its Solvency II Guidelines and suggested a more granular approach by advising to create a separate asset class under Solvency II standard formula for investments in infrastructure projects.

Corporate governance / accounting

The IASB confirmed that it will consult on temporary measures relating to the effective dates for IFRS 9 and the new insurance contracts standard, and proposed a temporary fix for insurers. They are concerned that if they have to apply a loan-loss rule - aimed mainly at forcing banks to recognise losses on loans earlier - from 2018 until the new insurance standard comes into force, their earnings could become volatile.


Commission President Juncker marked the resumption of the European institutions’ activity with a speech on the State of the Union debate stating that "our European Union is not in a good state," and called for a stronger union. Juncker also talked about the Greek bailout and the Five President’s report, and said that he would seek a fair deal for Britain because he believes that “the EU is better with Britain in it and that Britain is better within the EU.”

The debate in/out of the EU is becoming more and more intense for British and European regulators, with Britain and Spain’s prime ministers making a joint call for EU reform in the first days of September and increasing British business organizations calling on Cameron to push forward his plans for an EU Treaty revamp.

The British PM has put his campaign into high gear and his ‘renegotiations’ with the EU are seen by CEPS as a Russian roulette - in a new interim assessment published by the European think tank. UK’s Chancellor George Osborne has made shielding The City his central mission in the renegotiation of Britain’s EU membership, while the newly elected Labour party leader Jeremy Corbyn calls for EU reform focusing on social gains and worker’s rights.

OpenEurope released a new paper spelling out how to achieve a key pillar of the UK’s EU reform push: the non-Eurozone safeguards. In the meantime, surveys on Brexit keep on being conducted, with results as balanced as the outcome of a poll by the FSB showing that almost half (47%) of British small business owners would vote to stay in the European Union; or an in-depth YouGov polling conducted over the summer that reveals that “50% are currently leaning towards voting to stay, 40% are leaning towards voting to leave, 10% have no idea at all.”

© Graham Bishop

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