WHAT IS IT?
The European Commission has embarked on an aggressive tightening up of financial regulation and supervision.
The industry accepts regulatory change is needed but is worried about overkill.
WHO DREAMED IT UP?
The heavyweights doling out most of the punishment are in the Internal Market and Services Directorate- General, led by Commissioner Charlie McCreevy. It is a change of style, as during most of his time in office he has understood the benefits of industry-led solutions.
WHAT ARE THE MAIN PROVISIONS?
The Commission believes Europe must learn lessons from the crisis and comprehensively rethink regulatory and supervision rules for financial markets. First, it is imposing rules to encourage “responsible, ethical behaviour”:
-- Amend the Capital Requirements Directive (CRD) to reinforce requirements for financial institutions and rein in reckless speculation based on borrowed money.
-- Improve regulation of credit rating agencies.
-- Mitigate risks from credit derivatives.
-- Increase the amount protected under bank deposit guarantee schemes from €20,000 to €50,000 from October 2008 and within a year to €100,000.
Second, the Commission wants to improve supervision structures, to remove the mismatch between European financial markets on the one hand, and largely national supervision on the other. Proposals include:
-- ‘Colleges’” of supervisors led by the authority from the country a crossborder institution is primarily based in.
-- A high-level group chaired by Jacques de Laroisière, former managing director of the International Monetary Fund (IMF), to look at cross-border supervision issues.
-- Better co-ordination of supervision at a global level by working more closely with the IMF, the Financial Stability Forum and Transatlantic Economic Council.
WHAT’S IN THE SMALL PRINT?
The proposed changes to the CRD announced in October, which the Commission wants to adopt in April 2009, include a requirement to ensure that firms which originate, securitise and distribute loans keep 5% on their balance sheets to ensure they retain a share of the risk.
The deposit protection rule revisions require that by the end of 2008, EU states reduce the payout period in the event of a bank failure from three months to three days.
WHAT DOES THE INDUSTRY SAY?
Industry leaders say new regulatory initiatives should be developed globally. The European Banking Federation (EBF) believes in “the need for better and duly considered regulation and for a strongly co-ordinated approach to cross-border supervision”. But Michel Pébereau, EBF president and BNP Paribas chairman, insists that “hurried solutions to a rapidly evolving financial situation would be counterproductive, and merely lead to increased cost and reduced choice for issuers and investors”. The EBF is opposed to increasing deposit protection to €100,000 and says a three-day delay before a payout is “unrealistic”.
Simon Hills, executive director of the British Bankers’ Association, believes CRD rules requiring originators to retain 5% of the exposure “will not overcome concerns about the originate-to-distribute model and will be operationally difficult to implement”.
HOW MUCH WILL IT COST?
It is unquantifiable.
WHAT DO THE REGULATORS SAY?
“It is essential that financial institutions regain the confidence to lend to each other, and that ordinary people have faith in the security of their deposits,” says Mr McCreevy. “Our job will be to strengthen the framework that underpins that confidence.”
THE LAW OF UNINTENDED CONSEQUENCES
If the rules of the game are tougher than in the rest of the world, financial services will flee the EU.
COULD WE LIVE WITHOUT IT?
Better regulation and supervision is needed but not to the extent being planned.
