Macroprudential challenges topped many regulators’ agendas in June, with the ESRB, the BoE and the EBA all issuing new reports. The regulators are tentatively confident that EU banks are continuing to slowly turn the corner as the real economy improves. Their capital levels are up, profits have largely stabilised (albeit from a low base) and the sovereign debt crisis seems to have fizzled out. But both EU and national regulators remain concerned about houses prices - in particular Belgium, Sweden, Finland, France and the UK have been exercising attention. They believe that macroprudential tools can be used to curb the excesses in real estate or other sectors, and protect banks from another burst. These tools are particularly important in the Eurozone, where the ECB is firmly fixed on fighting deflationary pressures and not necessarily national housing bubbles. On the other hand, the IMF is challenging EU regulators’ views – it is less worried about housing bubbles and more worried that maintaining our historically low levels of inflation are unsustainable. Some stability has clearly been achieved – now the question is how to manage it. Hyman Minsky, the Keynesian economist, suggested that stability can be destabilising. His basic thesis is that the dynamic forces of a capitalist economy are explosive and must be contained by institutional ceilings and floors. Agreeing where those lines should be drawn isn’t easy.
Will fresh leadership in the EU mean a change of direction? Italy took over the Italian Presidency of the Council in June, setting out its priorities as financial crime, anti-money laundering and the banking union. EU leaders are still recovering from their recent fraught negotiations over the appointment of Jean-Claude Juncker as President of the EU Commission, but they will need to adopt a more cooperative approach to finalise key financial reforms. With the new EP getting underway at the beginning of July, the new ECON Committee will have an important role to play. It is expected to be chaired by Italian socialist, Roberto Gualtieri (S&D), with German MEPs Markus Ferber (EPP) and Peter Simon (S&D) as vice-chairs (expected to be elected on 14 July 2014 in Strasbourg). The UK’s representation on ECON has fallen from seven to six representatives, even though ECON will have 11 additional members.
MiFID II sprang into life in June when both the amended Directive and the new Regulation were published in the Official Journal, confirming the implementation date of 2 January 2017. It targets data and market fragmentation problems identified under the original Directive, while also taking on board many lessons from the financial crisis. It aims to substantially improve investor protection: making financial markets more transparent, addressing concerns about the advent of recent technology advances and ensuring that all trading venues are subject to some form of supervisory oversight. Financial market participants face a wave of enhanced supervision and reporting requirements to comply with the new regime—with significant costs in both time and money. Our feature article this month looks at what firms should be doing now as the countdown to the new regime begins.
On the Solvency II front, we are full steam ahead. EIOPA has published a hefty set of guidelines on the Directive, covering Pillar 1, internal models, systems of governance, supervisory review process and equivalence assessment of national supervisory authorities. In the UK, the PRA wrote to life and general insurance firms highlighting concerns about the internal model approval process under Solvency II. Not enough firms are making progress on their applications for model approval, so the PRA is encouraging firms to meet with their supervisors as soon as practical to agree joint plans to achieve model development.
The ‘too big to fail’ agenda continues to advance in the UK. Banks and business associations welcomed the UK Government’s decision to allow ring-fenced banks to offer simple derivative transactions to customers. The Government originally proposed prohibiting banks from offering basic risk-management services to business customers, which would have put them at a significant competitive disadvantage to their international peers. It has also eased the ability of ring-fenced banks to provide finance to smaller financial institutions, provided they obtain special permission from the PRA.
And more than a year after the FSA split, we are still learning more about our new regulators and their supervisory initiatives. In June, the PRA published updated us on its approach to banking and insurance supervision. The PRA continues to move away from a rules-based, process driven, style of supervision to a more judgement-based regime. In this update, it has introduced new Fundamental Rules (replacing the previous Principles for Businesses), and added a requirement for PRA regulated firms to prepare for orderly resolution. In this update, it also begins to grapple with its new secondary objective to promote competition in financial markets.
As you can see, we’ve had a busy June on the risk and regulatory agenda, which is likely to be followed by an equally busy July as regulators try to clear their plates ahead of summer holidays!