In the weeks leading up to the Brisbane G20 Summit, we had a steady flow of papers from the Financial Stability Board (FSB) including the long awaited TLAC proposal that is intended to be the lynch pin to end “too big to fail”, and a progress report on the FSB’s reform of resolution regimes and resolution planning for G-SIFIs. We intend to issue a short G20 Summit recap in the December edition. The Basel Committee on Banking Supervision has outlined the steps it intends to take to address the excessive variability in risk-weighted asset (RWA) calculations to improve the consistency and comparability of bank capital ratios – the bottom line is that RWAs will change and thus the amount and cost of capital for banks will increase. Look forward to a more detailed analysis of this from our team in the coming weeks.
We also saw the results of the European Central Bank’s Asset Quality Review (AQR) which scrutinized with unprecedented rigor the balance sheets and capital position of banks. The immediate market reaction to the results was relief, but confidence is muted by doubts of banks’ abilities to meet the fully-loaded Basel 3 requirements by 2019. We also had the UK’s version of leverage ratio and we await to see how the ECB will handle this topic.
The weeks marching up to the end of the year have been busy and with all of the information coming from rule-makers over recent days, one doesn’t need a crystal ball to dispel doubts that 2015 will be rich with technical papers from ESMA, EBA, and EIOPA – The future looks hazy with all the promised work plans.
I hope you find the articles below interesting. If you would like further information on any topic or have any questions, please do not hesitate to contact me or your usual KPMG contact.
Head of FS Markets
This month's insights
Life after the AQR
The European Central Bank’s (ECB) publication of its Asset Quality Review (AQR) was a vital, but only the first, step on the path to a sustainable European banking industry. The fact that through the process, a €24.6bn aggregate capital shortfall was identified and altogether €50bn has been raised this year to strengthen the bank balance sheets, reinforces the case for the exercise.
Lost in the details – European Supervisory Authorities publish workplans
Any doubts over the sheer volume of technical EU rule-making due to hit across financial services during 2015 was dispelled by the recently published workplans from the European Supervisory Authorities (ESAs). Over the coming months firms will need to prepare for the technical rules for the major pieces of regulation passed during the closing months of the last EU mandate. Although the overall direction of regulatory changes is known, the technical details are crucial so that firms can work through the full impact the rule changes will have on their business and operating models.
Market Abuse Directive – Is it MAD?
Financial institutions are starting to prepare for the next wave of securities regulatory change, kicking off MiFID II projects, which is one of the most far-reaching pieces of legislation written by the European regulators in recent times. Many financial institutions are still struggling to implement EMIR and AIFMD so are not yet focussed on the next wave of securities law and regulatory change, believing that it has plenty of time to implement change.
Creeping towards an international insurance capital standard
Just ahead of the G20 summit; the International Association of Insurance Supervisors (IAIS) released its basic capital requirement (BCR) paper in October. Applicable to the nine groups designated only as global systemically important insurers (G-SIIs), this marks the first step towards the development of a global insurance capital standard; of course the demo on the designation of G-SII reinsurers has been delayed again.
Banking structural reform
There have been two interesting developments on banking structural reform. First, in Europe, the European Parliament has returned to the Commission’s proposed Regulation (first issued in January 2014) on structural measures for large banking groups. The debate has already become polarised between those seeking to rein back the proposals and those wanting to go much further.
Overhauling bank business models to deliver stability and profitability
While regulatory reforms continue to focus on bringing greater stability to the banking sector, many banks are struggling to deliver sustainable profitability. In their recent global financial stability report the IMF highlighted that 80% of assets at the largest institutions globally have a return on equity (RoE) that does not cover the cost of capital required by their shareholders. The EBA’s own analysis highlighted that RoE is falling across Europe, with 75% of the assets in their December 2013 sample generating a RoE of less than 8 %. More specifically 39% of total assets in that sample generated a RoE of less than 4%.
Liquidity – Tighter regulation may not yield intended results
A working paper published by the BIS claims that there is no evidence that the tightening of liquidity regulation in the UK in 2010 had an impact on the overall size of bank balance sheets, or a detrimental impact on lending to the non-financial sector.
On the radar
- ECON Committee meets – 24 November
- EBA hearing on simplified ‘living wills’ – 25 November
- ECON Committee meets – 1 December
- EIOPA deadline for conflicts in investment products – 1 December
- FSB deadline in consultations on cross-border bank resolutions – 1 December
- EU Parliament economic committee meets – 2 December
- EBA hearing on simple, clear securitizations – 2 December
- IOSCO: Comments due on non-GAAP measures consultation – 5 December
- EBA hearing on rules for group support – 8 December
- ECON Committee meets – 8 December
- EU finance ministers debate benchmarks, money markets – 9 December
- ESMA venture-capital consultation deadline – 10 December