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Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
Regulatory Reform Developments in Europe
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Regulatory Reform Developments in Europe

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Banking Challenges and Opportunities in an Era of Global Crisis …

Banking Challenges and Opportunities in an Era of Global Crisis
.
The drying-up of interbank markets was the worst possible crisis for the Eurozone (an imperfect monetary union with no fiscal union)
The European legislative process is quite complex: the European Commission, the Members States (represented in the European Council) and the European Parliament are involved in the so-called “trialogue”
It is important to distinguish between the EU-28 and the EU-17.The Banking Union is a project with a Eurozone scope (EU-17)
The EU has adopted most of the regulatory reforms agreed within the G20 and the FSB since the beginning of the crisis
The reform has 3 main objectives: (i) reinforcing bank’s balance sheet resilience, (ii) addressing systemic risk and (iii) protecting taxpayers
Global regulatory consistency must be reinforced

Published in: Economy & Finance, Business
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  • 1. Regulatory Reform Developments in Europe Banking Challenges and Opportunities in an Era of Global Crisis Santiago Fernández de Lis Federal Reserve Bank of Atlanta 20th November 2013
  • 2. Section 1 General Remarks The drying-up of interbank markets was the worst possible crisis for the Eurozone (an imperfect monetary union with no fiscal union) The European legislative process is quite complex: the European Commission, the Members States (represented in the European Council) and the European Parliament are involved in the so-called “trialogue” It is important to distinguish between the EU-28 and the EU-17.The Banking Union is a project with a Eurozone scope (EU-17) The EU has adopted most of the regulatory reforms agreed within the G20 and the FSB since the beginning of the crisis The reform has 3 main objectives: (i) reinforcing bank’s balance sheet resilience, (ii) addressing systemic risk and (iii) protecting taxpayers Global regulatory consistency must be reinforced Page 2
  • 3. Section 1 European regulatory reform and banking union New European Systemic Risk Board Transposition of Basel III rules Capital/ Leverage Macroprudential Liquidity OTC derivatives, Infrastructures Financial markets Supervision Credit Rating Agencies Structural reforms Separation of retail and investment banking activities Three new Authorities • Banking (EBA) • Markets (ESMA) • Pensions & Insurance (EIOPA) Single Supervision (SSM) Bank Resolution Single Resolution (SRM) Harmonization of Resolution & DGS regulation BANKING UNION (EUROZONE) Page 3
  • 4. Section 2 Transposition of Basel III in the EU In line with Basel III: 4,5% CET1 + 2,5% conservation buffer Countercyclical buffer: up to 2,5% (national discretion) Capital • • Systemic risk National discretionary powers: • Systemic risk buffer (financial sector): 1 – 3% • SIFI Buffer (institutions): G-SIFI (1-3,5%); Other-SIFI (0-2%) Leverage • 3% minimum (binding since 01/2018) Liquidity • • Pending calibration of LCR 100% target in 2018 (BIS: 2019). Earlier implementation possible at national level Remunerations • From 2015 bonuses capped to fixed salary (1:1) (2:1 with shareholders approval) Implementation date: 01/01/2014 Page 4
  • 5. Section 3 Bank resolution: a revolutionary change Objetive • Orderly resolution while minimizing cost for taxpayers • Based on FSB Key Attributes (but went much further in tying the hands of the authorities) • European approach: not only about Too Big To Fail Tools • Sale of business • Bridge institution • Asset separation • Bail-in (main loss-absorbing tool) Main aspects under discussion by legislators Bail-in • Harmonized hierarchy of creditors • Depositor’s protection • Minimum internal loss-absorption • Discretionary exclusion of certain liabilities • Partial bail-in in since July 2013 State aid rules • Government stabilization tools / Role of European funds under discussion (ESM) • Funded by the industry Resolution fund • Resolution fund/deposit guarantee schemes: joint or separate • Eurozone: Single Resolution Fund under discussion Page 5
  • 6. Section 3 Resolution: bail-in and use of Resolution Fund 8% internal loss absorption Financing of Fund Loss absorption or capital injection up to a limit of 5% of total liabilities Banks: ex-ante, ex-post and, exceptionally, alternative financing sources (private/public) DGS (covered deposits) Households & SME Eligible deposits (> EUR 100,000) Senior Debt & Corporate deposits >EUR 100,000 LOSS ABSORPTION More bail-in or eventually alternative financing sources (private, public/ESM) Resolution Fund 5% liabilities Subordinated debt Fund could absorb losses Use of Fund 8% of total liabilities to be absorbed by shareholders & creditors before use of Fund. Depo preference and constrained discretion for bail-in exemptions Depositor preference HIERARCHY AT1 and AT2 Alternative financing sources Only after 5% Fund cap has been reached and all unsecured and non-preferred liabilities other than eligible deposits have been bailed in Internal absorption 8 % liabilities (hierarchy order) CET1 Page 6
  • 7. Section 4 The Eurozone needs a banking union To stop fragmentation and separate sovereign and banking risk European Banks: Average exposures to banks located in other EU members USD (dollars). Use of cross-border collateral in Eurosystem monetary policy operations (% total) Source: BIS Source: ECB 800.000 80% 700.000 70% 600.000 60% 500.000 50% -42% 400.000 300.000 40% 30% 200.000 -55% 100.000 20% Core to core Core to periphery Distressed countries Dec-12 Sep-12 Dec-11 Mar-12 Jun-12 Sep-11 Dec-10 Mar-11 Jun-11 Sep-10 Dec-09 Mar-10 Jun-10 Sep-09 Dec-08 Mar-09 Jun-09 0% Sep-08 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-09 Dec-08 Jun-08 Dec-07 Jun-07 Dec-06 Jun-06 Dec-05 0 Dec-07 Mar-08 Jun-08 10% Non-distressed countries Re-nationalization of the financial systems fuelled by (i) market-driven segmentation, (ii) rating agencies and (iii) regulation (mostly moral suasion) Page 7
  • 8. Section 4 The banking union project Single Deposit Guarantee Scheme Single Resolution Single Supervision Single Rulebook • Single Supervisory • Capital Requirements 1. European Central Bank 2. National supervisory authorities Directive (CRD IV) Mechanism: • Not in the mid term roadmap Single Resolution Mechanism: 1. Single Resolution Authority 2. • Treaty reform required Single Resolution Fund • Precondition: comprehensive asset review (AQR+ Stress test) ? Under implementation Under implementation Under negotiation To be negotiated Page 8
  • 9. Section 4 Banking union: the way forward 1. The EZ needs a fully fledged banking union. This includes single supervision, single resolution and some elements of debt mutualization and fiscal union 2. Dealing with legacy problems is key: comprehensive assessment of banks by the ECB, Asset Quality Review (AQR) and Stress Test with EBA. 3. Backstops: private, public (national), public with European Stability Mechanism – ESM -support (but no direct recapitalization by ESM before Single Supervision) 4. Bail in will contribute to separate the sovereign and banking risk: hydrids already in force, senior debt in 2018 (may be 2015) 5. Negotiations on Single Resolution Mechanism are at a stalemate but time runs out. Fiscal union by the backdoor? Reform of the Treaty? Page 9
  • 10. Sección 5 Global regulatory consistency is needed • Excessive regulatory activism • Procyclicality • Ring-fencing • Overlapping New Risks • Extraterritoriality • Fragmentation of financial markets • Pro-cyclicality // Delay in economic recovery • Regulatory arbitrage • Shadow banking • Increase in cost of financial intermediation Ensuring international cooperation and global consistency ¿ How ? New Trends New trends in regulation puts at risk the efficiency of the reform • Promoting mutual recognition of standards • Ensuring a careful calibration and coordinated implementation of new rules. Supervision is key • Intensifying the transatlantic dialogue between US and EU, leading towards convergence • Acknowledging different realities beyond US/EU. Emerging countries: focus on financial inclusion Pagina 10
  • 11. Thanks! sfernandezdelis@bbva.com
  • 12. Annex Single Supervision Already in force. Fully operational in November 2014 A Main goal: Restoring confidence in the Euro by stopping financial market fragmentation B Institutional setup • • • • Mandate: Eurozone-wide financial stability Authority: European Central Bank (ECB) is the ultimate responsible but: • Direct supervision of top 130 banks • Indirect supervision (through national supervisors) of the rest (6,000 banks) Scope: Eurozone + open for no euro countries willing to join Governance: Separate Board inside the ECB  Why the ECB? Prestige, independence, know-how + legally suitable  Risk: Necessary separation between supervision and monetary policy C Prior to full operation: legacy issue  Asset Quality Review +Stress tets (Nov‘13-Oct’14) Page 12
  • 13. Annex The need for an SRM The SRM: main objectives Provide a credible counterparty to the SSM on the resolution side Ensure a uniform implementation of the EU bank resolution rules Guarantee a level playing field across the Eurozone Provide the EU with a satisfactory solution to cross-border resolution Provide greater clarity in the relationship between CMGs and resolution colleges Page 13
  • 14. Annex Fixing the Legacy Issue A robust comprehensive assestment • Sound methodology • High transparency • Sound loss absorption Enough backstops: sequence 1. Tapping the markets 2. Banks’ balance sheet management 3. Implementing partial bailin 4. Fiscal backstops at national level 5. European backstop To ensure credible results Page 14

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