Expect the unexpected. Expect house prices to collapse following a property crash, wholesale money markets to freeze when you need them most, real interest rates to stay in negative territory for six years and sovereigns to default on their debt. This was one of the lessons from the recent financial crisis (and from history too for those that can care to remember) and it’s as relevant now as it was then. A year-ago a UK and Scotland divorce, breaking up a 308 year-old political, economic and cultural union looked unlikely. But the tides of change move quickly and the recent surge in the pro-independence camp is forcing financial institutions, on both sides of Hadrian’s Wall, to consider the consequences of Scottish independence. The vote on 18 September 2014 may mark a critical shift in the UK’s future financial opportunities.
Thinking the unthinkable is an important part of effective risk management. Stress testing is a useful tool in this regard to test the consequences of idiosyncratic and market-wide risks. In August, the EBA published the final templates for the 2014 EU-wide stress test. The data to be disclosed in the EBA templates will cover banks' composition of capital, RWAs, profit and loss, exposures to sovereigns, credit risk and securitisation. In all, the EBA will be publishing up to 12,000 data points per bank across the entire EU banking system in November.
Insuring against unexpected events, whether car accidents or geo-political shifts, is part and parcel of what insurance firms do. While the implementation of Solvency II cannot be considered as unexpected (first mooted a decade ago), it is exercising considerable attention of late. In early August, the PRA and HMT published its latest proposals for the implementation of Solvency II in the UK. The consultations describe the proposed initial set of national specific reporting templates together with giving details on the regulation of UK branches of third country insurers and the application of both matching and volatility adjustments. We have prepared a hot topic, Solvency II implementation in the UK takes shape, which outlines these proposed changes in further detail and how firms should approach it.
Dealing with the sovereign debt crisis in Europe was certainly unexpected by many. In August, the EC published a report card on the performance of the pan-EU regulators (the European Supervisory Authorities and European Systemic Risk Board) during this tumultuous time. Overall, the EC believes that the regulators did well during their first three years of operations: building functioning organisations, delivering on their mandates and developing their own profiles. The EC points to the successful recapitalisation exercise of European banks in 2011, the supervision of credit ratings agencies and the instillation of a macroprudential bent on policy making as some of the examples where regulators have made significant progress. But nothing is perfect and the EC is interested in changing a number of things about how the regulators work, including their governance, their focus (greater attention to customer protection) and their funding model.
The post-financial crisis reform agenda was not unexpected, given the scale of problems highlighted during the financial crisis. UCITS V was published in the Official Journal this week, which will apply AIFMD type reforms in remuneration and depositary rules for UCITS funds. The Payments Account Directive (PAD) was also published in the Official Journal. PAD will give all EU consumers the right to open a payment account across the EU to perform essential operations such as receiving their salary and paying their pensions, without being resident of the country where the credit institution is located.The feature article this month looks at the role of social media and how firms and regulators need to adapt their processes to generate good customer outcomes.