David Doyle, policy expert on European financial markets, discussed the latest European financial services legislative movements at the Financial Services Club yesterday.
David began with an outline of the priorities for the Czech Presidency of
the European Union, which runs through to June:
- review of the Capital
Requirements Directive for the capital adequacy of investment firms and
- negotiations of the Solvency II Directive regulating the insurance
- regulation of credit rating agencies;
- a new Directive for electronic money institutions;
- review of the regulation on cross-border payments in euro;
- review of the Market Abuse Directive;
- a New Prospectus Directive;
- UCITS IV; and
- updating the International Financial Reporting Standards (IFRS).
I guess having so many priorities is not surprising, given the events of the past six months, but this list is too long and the priorities are too many. Therefore, David focused upon the changes to Solvency II and the revised Capital Requirements Directive (CRD).
These are significant changes to the original implementation of Basel II in Europe. For example, the new rules for the CRD were put forward on 1st October 2008, two weeks after Lehman Brothers collapse:
“The European Commission has put forward a revision of EU rules on capital requirements for banks that is designed to reinforce the stability of the financial system, reduce risk exposure and improve supervision of banks that operate in more than one EU country. Under the new rules, banks will be restricted in lending beyond a certain limit to any one party, while national supervisory authorities will have a better overview of the activities of cross-border banking groups. The proposal, which amends the existing Capital Requirements Directives, reflects extensive consultation with international partners, Member States and industry. It now passes to the European Parliament and the Council of Ministers for consideration.”
The critical changes include improving the:
- management of large exposures, particularly by introducing restrictions in interbank exposures;
- supervision of cross-border banking groups through a collegiate of supervisors;
- assessment of the quality of banks' capital through 'hybrid' capital rules incorporating both equity and debt elements;
- liquidity risk management: for banking groups that operate in multiple EU countries; and
- risk management for securitised products through new rules on securitised debt.
There are some major points raised here. For example:
- the concept that banks must not be allowed to lend more than 25% of the their capital;
- that regulators across all markets work together to monitor the activities of key cross-border groups and, bearing in mind that over 70% of all cross-border activities are transacted by only 45 financial institutions, this may mean more stringent regulation through both home and host oversight;
- a need to retain a minimum 5%of capital for anything that is securitised, with some still asking for this to be raised to 15%;
The thing is that this is all being fast-tracked, with the intention of sign-off in the European Parliament for the revised CRD by April 2009.
That’s fast and raises the concerns of irrational and ill-thought through regulation, rather than better regulation. However, bearing in mind that there are MEP elections in June and a new Commission selected in November, when Charlie McCreevy leaves office, and you can see why they want to get this through in time for implementation.
David proceeded to analyse developments in other areas, such as:
- the EU’s divergent policies on credit rating agencies, who will be banned from providing any advisory services as well as providing complete transparency of the models, methodologies and key assumptions on which they base their ratings;
- the Electronic Money Directive which will enforce same day payments for euro-based direct debits and credit transfers, but will not apply to mobile operators (why not?); and
- the fact that the Commission now has Hedge Funds and Private Equity in their line of sight, as well as short selling and dark pool equities trading, with a new Directive likely to target this area.
David’s analysis was wide and deep, which is the reason why I invited him to address our meeting. He concluded with the fact that there are estimated to be 123 regulatory supervisors across the EU, who will now work as a collegiate to enforce these rules under a single EU Regulatory Authority.
The single EU regulatory authority has been a challenge for a long time, and with recent developments looks increasingly likely.
We finished the evening with questions that focused upon principles-based versus rules-based regulations; the world after Charlie McCreevy and whether there will be big changes if a non-Northern Commissioner is selected; Davos, the G8 and the G20, and the whole challenge of domestic versus regional versus global regulatory co-ordination.
The conclusion is that regulators are scrambling to plug the gaps and issues created in recent days. Their fast-track actions may not be the right ones long-term but are the necessary ones for the short-term.
We also announced the fact that the Financial Services Club is launching a European Financial Regulatory Advisory Group. If any of you are interested in learning more about these developments, just let me know.
David is known across Europe as a leading expert on EU financial market regulation and has an in-depth understanding and knowledge of the critical aspects we face today such as MiFID and SEPA. He is a former diplomat with over 20 years of service on mainland Europe and an EU Policy Expert on Financial Markets.
Photography: Tom Groenfeldt