Enria to restrict higher capital requirements within the EU

Not surprisingly the Head of the European Banking Authority, Andrea Enrina, has called to limit the discretion given to national central banks in their ability to set a buffer to the capital requirements. This severely impedes the ability of any one nation to protect its taxpayers form further bailouts, as a pan European capital requirement is likely to be not much higher than the Basel III requirement's, which may not be an adequate reflection for individual countries risk.

I say it is not a surprise because Enria is know to believe that in order for EU to progress there has to be more harmonisation towards a central European banking policy. During his first interview with the EU parliament back in February he reiterated his determination to produce a single 'rule book' for pan European banking regulations. Therefore curbing individual countries discretion in their home turf. He is also determined to bring a more top down approach to banking regulation within the EU. This announcement in London today is just a demonstration of this strategy.

The banks of Europe will take a sigh of relief today, since now they are reasonably assured that capital requirements will not be vary heavily from the Basel III requirements.

Talks of a 19% core tier one ratio for Swiss banks would have stirred the debate within other countries in Europe like Britain who are yet to formally agree on the enhanced figure. 10% is the figure the IBC has recommended in its report to which the chancellor has privately alluded his support.

Thus the public protest by the UK , Swiss and five other countries is not out of the blue. Mervyn King said in parliament this week that setting a maximum capital requirement severely restrict the individual countries ability to prepare for its individual financial stability.

Enria's defence of trying to avoid regulatory arbitrage within the EU is a fair defence, however, the real strategy is to harness the combined power of controlling a pan-european banking system.

In order to do this the EC has established several regulatory authorities amongst which is the ESRB or European Systemic Risk Board, which is responsible for the macro-prudential oversight of the financial system within the EU.

The ESRB will work along with the EBA in order to come to a capital requirement figure. Similarly, the European System of Financial Supervision (ESFS) will look to address the issue of integrated financial risks and vulnerabilities within the EU.

It is too soon to tell if these new regulatory authorities will have the ability to really make a change to the financial system of the Europe which is in dire need of reform.

European System of Financial Supervision (ESFS)

http://www.esrb.europa.eu/news/pr/2011/html/index.en.html

http://www.gfsnews.com/article/1100/1/

EU regulator in bank capital compromise - FT.com

Financial Policy Committee

The Financial Policy committee is charged by the government  to overlook macroprudential risks in the financial system.  The government is rightly concerned with the sustained heightened systematic risks in the financial sector and therefore this committee is looking at ways to advise the regulators and banks on what has proven to be the weak link in during the financial crises.  

The  Committee is being chaired by the Governor of the Bank of England, Mervyn King and also includes: the Bank's Deputy Governor for Financial Stability, Paul Tucker; the Bank's Deputy Governor for Monetary Policy, Charlie Bean; the Chief Executive of the Financial Services Authority, Hector Sants (in his capacity as future Deputy Governor for Prudential Regulation and Chief Executive of the Prudential Regulation Authority); the Chairman of the Financial Services Authority, Adair Turner; the Bank's Executive Director for Financial Stability, Andy Haldane; and the Bank's Executive Director for Markets, Paul Fisher. The Chancellor has appointed three of the four planned external members of the interim FPC: Alastair Clark, Michael Cohrs, and Donald Kohn. There are also two non-voting members: the Chief Executive designate of the Financial Conduct Authority, Martin Wheatley, who will take up his position in the autumn, and will become a full member of the statutory FPC; and a representative of the Treasury.

 Reading the names above, it seems a list of the who's who of the financial sector administration and regulators in the UK. Hopefully they will get something concrete accomplished. This body, however, doesn't have official sanction from the parliment. Therefore it is an Interim committee mostly restricting it self to reviewing the financial situation and issuing recommendations through the product of their group discussions. 

This committee does have the ability navigate the muddy waters of the European bonds situation and steer to fairer waters for the banking industry in general. However, one cannot help but look at the committee and think that instead of creating change in the culture and method of business in most financial institutions the government is insisting on having more discussions and creating more bodies to have those discussions in.  Creating more regulators or supervisors of is not the solution to the crises, until you except that the current banking model is inherently susceptible to financial crises due to its debt driven nature.

Conversely, this committee is destined to be supervisor of the regulators. It gives more power to the Bank of England and lets the world know that Britain is Serious about Banking Reform. 

Their recent publication of their first meeting showed that they are indeed taking a broad view on each of the macro prudential issues in the current environment.  They have so far recommended to the banks that they save more capital in time on healthier profits in order to meet the higher capital requirements. Advised the FSA to report on the major banks exposures and make it a regular feature in their oversight. They also advised the FSA to compile data on the current sovereign and banking sector exposure of UK banks not subject to the EBA stress test and extend its review of the banks provisioning practices in terms of both household and corporate sector exposures on a global basis. They also encouraged the FSA to keep a keener eye on opaque funding structures employed by ETF’s.

This Committee can be the conduit of change for financial reform which is much needed in the country, if they make courageous decisions in terms of restructuring financial institutions and regulation in general.  

Swiss are Making banking safer.

Switzerland passes new rules to make banks safest in the world

Lawmakers in Switzerland have agreed to raise the Core Tier one Capital requirement to a whooping 19%. This leaves behind the dismal 7% implemented by Basel III as a minimum tier one capital requirement. It is estimated that the Swiss Banks will have to raise around 108 Billion Pounds in the near future.

The passing of this bill by the upper house will ensure that Swiss banks remain as the safest place in the financial world to bank with as they will be the most liquid. However the lower house still has to agree to this proposal which will be heard in September this year.

The 19% core tier one capital includes 10 % in traditional capital requirements with the further 9% coming from C0C0 Bonds. CoCo bonds are a kind of hybrid between debt and equity: they are issued as debt but convert automatically into equity when a bank gets into trouble. Therefore although not pure capital in the traditional sense, CoCo bonds makes the bank take on more responsibility which is ultimately what regulators want.

In the UK George Osbourne has indicated that he might implement the higher 10% capital ratio recommendation by the independent banking commission. He is also looking into the recommendation that core banking activities should be ring-fenced in order to protect the depositor for higher risk investment banking.

Similarly the Financial Policy Committee is set to meet for the first time today. According to Mr Osbourne the role of the FPC is to "monitor overall risk in the financial system. identify bubbles as they develop, spot dangerous inter-connections and deploy new tools to deal with excessive levels of leverage before its too late." a wide mandate given to the Bank of England.

The Bank of England Governor Mervin King said " Until we find a solution to the 'too important to fail' problem, the size of the banking system will remain too large for the UK taxpayer credibly to support in the future'

The FPC will release its first report based on todays meeting on the 24th of June.

http://www.reuters.com/article/2011/06/15/swiss-regulation-idUSLDE75E0XA20110615

CoCo bonds:

http://peo.cambridge.org/index.php?option=com_content&view=article&id=213:coco-bonds&catid=10:jargon-buster&Itemid=4

http://www.freshbusinessthinking.com/news.php?NID=8926&Title=Financial+Policy+Committee+set+for+first+meeting

IMF Critical of Banking Reform!

Looking back at this financial crises the IMF form the view that although the reaction's of governments was swift, it was rather superficial and left us with less options when the crises happens again.

...compared with earlier episodes, the response featured less attention to indepth diagnosis of financial institutions and fewer incentives for an early restructuring of assets.


This more than validates the arguments by campaigners that financial reform is needed. What the present government has done has been superficial and just a transfer of debt to the public purse.

 The policy mix applied in the recent crisis has come at a high overall cost and has intensified moral hazard. The mix is unlikely to be repeated in response to a future crisis because it would be too costly economically and too controversial politically. In preparing for a future crisis, therefore, we must consider how to apply the constructive aspects of the recent response—early stabilization through accommodative policies—and improve the areas in which it was weakest—the limited conditionality of public support and the gradual restructuring of assets.


We haven't gone far enough to reform our banks. Basel III requirement's are viewed as lax, at best, by most financial commentators.

We are slowly loosing the opportunity to prevent the next financial crises. It will be more painful and  more costly when it happens next as pointed out above.

The trigger of this financial crises was the incorrect values of assets priced by banks and financial institutions. One would have hoped that after the crises we would have taken a better look at what these assets are truly worth ? Instead we decided to give most, if not all, Bank Assets a haircut. We gave them an arbitrary number to aim for, hmmm let see... Seven? A nice number don't you think?  In this short-cut world of today instead of valuing the assets properly we just guaranteed them to calm the masses, as sated in this IMF document.  


Asset guarantees have been provided on both ‘good’ and ‘bad’ assets and were seemingly deployed primarily as a crisis containment tools to reassure creditors that banks were sufficiently capitalized rather than to restructure banks balance sheets.

It is in the interest of the politicians and government's to resolve this crisis fore the sake of the industry.




http://www.imf.org/external/pubs/ft/sdn/2011/sdn1105.pdf

Ben Broadbent appointed to BOE

Ben Broadbent will replace Andrew Sentance on the BOE MPC starting from the first of june. Ben was a fullbright scholar at Harvard university where he completed his PHD after attained a first degree from Cambridge.

Ben replaces Chief hawk Andrew Sentance who completed two terms on the MPC. Andrew will still be voting on the May meeting of the MPC where the rates are expected to be adjusted upwards to combat inflation.

Ben proposes alternative views on the measure of GDP and contests the view that Government cutbacks will hinder the growth of the Economy.

Broadbent will join Posen, Weale and David Miles as the fourth external member in the rate-setting panel. Governor Mervyn King, Paul Tucker, Charles Bean, Paul Fisher and Dale are internal members.

Ben Broadbent nominated to BoE | Money Supply | News, data and opinions on market-moving economics from the Financial Times – FT.com