This month's insights…
After months of delays a sudden breakthrough in Europe's new trading rules caught many in the industry by surprise. The big step forward came from Finance Ministers who reached a deal after months of clashes over issues such as pre-trade transparency, open access to trading venues and restrictions on dark pools. Click here for more.
On 19 June 2013, the UK Parliamentary Commission on Banking Standards (PCBS) published its recommendations on how the culture and standards of behaviour in banking could be improved. Click here for more.
This is a solution for a specific British issue, however, it is possible that some of the learning points of this could be adopted more internationally in due course.
The bank recovery and resolution rules appear to have got stuck with finance ministers recently failing to agree critical details on the use of national discretions, including which liabilities are bailed-in and on the use of resolution funds to recapitalise failing banks.
The Irish Presidency's latest and possibly final compromise text attempted a "mixed approach" limiting national discretion through a mix of quantitative guidelines and Commission powers to intervene. Click here for more.
The European Securities and Markets Authority (ESMA) has published their final remuneration guidelines as part of the enhanced Markets in Financial Instruments Directive (MiFID) provisions, designed to strengthen investor protection. The new rules apply to investment firms including credit institutions and fund managers that provide MiFID investment services. Follow the 'more' link below to find out:
What are the new rules?
- Which firms do the rules apply to?
- Which employees do the rules apply to?
- Next steps for firms
Click here for more.
With just one month to go until the AIFMD regime applies, the European Securities and Markets Authority (ESMA) is close to finalising its work on guidelines on the series of detailed information that in-scope fund managers will have to report on the portfolio of AIFs they manage or market in the European Union. Click here for more.
European Commission opposes further Solvency II delays
The European Commission are resisting pressure to introduce another Directive to delay the start date of Solvency II (SII). Currently, the legal position is that SII must be incorporated into national law by 30 June 2013 – with the regulation applying to firms from 1 Jan 2014. While these dates are clearly impossible, the European Commission have resisted putting through another directive to delay the legal start date. It is hoped this will encourage a resolution to the Omnibus II debate in October. It is widely reported that instead of another delay, the EC are proposing to issue a letter to member states confirming that legal action will not be taken against them.
At the IAIS Global Seminar held 18 June in Basel, the Chair of the Financial Stability Policy Subcommittee provided an update on the latest IAIS thinking around Global Systemically Important Insurers (G-SII) and the policy measures which are likely to be adopted next month. The three key areas involving G-SII policy measures will focus upon: enhanced supervision; resolution; and greater ability to absorb loses (HLA). Click here for more.
The study, which was completed by insurers across Europe, tested the application of Solvency II to products with attaching long-term guarantees – a topic of long debate. Since 31 March, when the results were due in, the European Insurance and Occupational Pensions Authority (EIOPA) has been analysing the results in order to recommend potential solutions to this debate. Click here for more.
On the radar…
- 3 July – European Commission Consultation on reform of the EU banking sector closes
- 16 July – European Commission proposal on indices and benchmarks expected
- 19 July – European Commission Consultation on the European System of Financial Supervision closes
- July – European Commission communication on shadow banking expected
- July – European Commission proposals on money market funds expected
The race to set standards in global tax management
This KPMG report uncovers the most pressing issues faced by tax executives around the world and delivers insight on how these issues influence changes in structure, investment in people and processes, and overall objectives and priorities.
Light at the end of the tunnel?
We are pleased to announce the release of our third annual report on regulation in the global investment management industry: Evolving Investment Management Regulation: Light at the end of the tunnel?
We believed 2013 would be ‘The Year of Implementation’ for the post-crisis regulatory reforms. While new policies continue to emerge, several key investment management regulations are already at the implementation stage. Each brings specific challenges but, as the intensity calms, there does appear to be light at the end of the tunnel.
Evolving Investment Management Regulation brings together the key regulatory issues affecting asset managers and investors in the Americas, AsiaPacific, Europe and the Middle East, highlighting implications for now and the future.
This KPMG report provides an update on our thinking around the opportunities and challenges following the legal transition from the Financial Services Authority to the new regulatory bodies: Financial Policy Committee; Prudential Regulation Authority; and Financial Conduct Authority. Access the report
This report provides an impact analysis of the accumulation of regulations on the Belgian banking sector. KPMG suggests that the financial sector, the politicians, the rules-setting bodies and banks' customers must all consider the combined and cumulative impact of all the new and proposed regulations. Access the report
Readers may recall that KPMG in the Netherlands conducted a similar study analysing the effects of the increase in – and accumulation of – regulations on the services provided by the Dutch banking sector. Access the report
There has been much discussion recently on the possible inclusion of a funding spread over Libor (referred to as funding valuation adjustment or FVA) within the approach adopted to value derivatives. As well as valuation, the discussion touches on aspects of accounting, regulatory capital and an institution's internal liquidity management. There are a number of complex aspects of this being debated and this piece of KPMG thought leadership sets out a series of proposal for ways forward in a number of these areas. Access the report
The latest version of the Euro Crisis update is now available to download.
The Council of the European Union has agreed its position on the Recovery and Resolution Directive for credit institutions (RRD). The next step is for the Presidency to try to reach agreement with the European Parliament. The Council hopes that this can be achieved in time to adopt the RRD by the end of this year.
In this alert we focus mostly on how the RRD has evolved since the Commission published a proposed Directive twelve months ago. Click here to read our analysis from June 2012.
The key points here relate to the bail-in tool and to the creation of national resolution funds.
Implications for firms…
- Firms should be developing their recovery plans and resolution packs in line with the requirements set out in the RRD. The European Banking Authority (EBA) has already begun to develop detailed guidance here.
- Firms will face higher costs and constraints on their funding strategies as a result of:
- National authorities will have the discretion to impose requirements on banks (on a case-by-case basis) to hold a minimum amount of own funds and eligible liabilities (ie liabilities that can be bailed-in), depending on the size, risk and business model of each bank;
- National requirements to hold bail-in liabilities in each relevant legal entity; and
- The pre-funding of a resolution fund or Deposit Guarantee Scheme, and the additional funding that would be required if a fund proves to be inadequate.
- Firms will need to respond to changes demanded by the authorities to improve the credibility and effectiveness of recovery and resolution planning, including higher amounts of contingent capital and funding to underpin recovery, and changes to business activities and legal entity and operational structures to facilitate resolution.
- Firms need to consider the impact of these proposals – together with all the other elements of regulatory reform – on their business models and on their legal entity and operating structures. The magnitude of reform may threaten the viability of existing business activities and structures, requiring a step change if the firm is to emerge with a viable franchise.
- Firms with cross-border activities should be aware of potentially costly differences in the requirements imposed by national authorities, both within and outside the EU, including:
- The stresses and scenarios that a recovery plan should cover;
- The extent to which national authorities require firms to make their recovery plans more robust;
- The detailed information to be provided within resolution packs;
- Which financial and economic functions should be regarded as being critical;
- The extent to which national authorities require firms to change their business activities and their legal and operational structures in advance to reduce the cost and complexity of resolution;
- The conditions under which the authorities will trigger a resolution; and
- The use of resolution tools and powers by national authorities, including the use of the national discretions provided for the use of the bail-in tool.
- Firms face a period of continuing uncertainty before the resolution powers of the authorities are finalised – and probably for even longer before effective cross-border resolution measures are introduced. Longer-term, firms may need to adjust to the European Commission's preference to establish an EU-wide harmonised insolvency regime, and to any progress in establishing a banking union wide resolution authority and resolution fund.
- Smaller firms will need to discuss with their national authorities what relief they might obtain from these requirements, depending on the nature, size, complexity and systemic risk of their business.
- Similar recovery and resolution requirements may be introduced in due course for insurance companies, financial market infrastructure and other financial institutions, mirroring the Financial Stability Board's (FSB) approach to systemically important firms.
In the detail…
The agreement reached by the Council followed intensive discussion on two key areas of the RRD – the bail-in tool and national resolution funds.
The Bail-in tool
The Council agreement on the use of the bail-in tool contains three main elements.
Exclusions from eligible liabilities
First, some liabilities are excluded from being eligible for bail-in. The most interesting aspect of the Council agreement here is that interbank liabilities with less than 7 days original maturity should be excluded from eligible liabilities. It remains to be seen whether the Parliament will accept this.
The full list of exclusions is:
- covered (insured) deposits;
- secured liabilities, including covered bonds; • liabilities to employees, such as fixed salary and pension benefits;
- commercial claims relating to goods and services critical for the daily functioning of the institution;
- liabilities arising from a participation in payment systems which have a remaining maturity of less than seven days; and
- interbank liabilities with an original maturity of less than seven days.
Second, the Council has agreed a clear order of depositor preference, and thus an expectation that liabilities will be bailed-in in the following order:
- Other regulatory capital
- Ordinary unsecured creditors (including bondholders) and large corporate depositors
- Natural persons, SMEs and the European Investment Bank
- Deposit Guarantee Scheme (but leaving insured depositors themselves fully protected, so the cost here would fall on other banks that fund the Scheme).
Third, national resolution authorities have the discretion to exclude, or partially exclude, liabilities from bail-in on a discretionary basis for the following reasons:
- if they cannot be bailed in within a reasonable time;
- to ensure continuity of critical functions;
- to avoid contagion; or
- to avoid value destruction that would raise losses borne by other creditors.
National resolution authorities would be able to compensate for the discretionary exclusion of some liabilities by passing these losses on to other creditors, as long as no creditor is worse off than under normal insolvency proceedings, or through a contribution by the resolution fund.
However, such flexibility would only be available:
- After losses equal to at least 8% of total liabilities (including own funds) had been imposed on an institution's shareholders and creditors, or under special circumstances 20% of an institution's risk weighted assets;
- where the resolution fund had at its disposal ex ante contributions which amount to at least 3% of covered deposits (presumably of the banking system as a whole); and
- the contribution of the resolution fund would be capped at 5% of an institution's total liabilities. In extraordinary circumstances, where this limit has been exceeded, and where all unsecured, non-preferred liabilities other than eligible deposits have been bailed in, the resolution authority may seek funding from alternative financing sources.
Member states would be required, as a general rule, to set up ex-ante resolution funds, and to reach, within 10 years, a target level of at least 0.8% of covered deposits of all the credit institutions authorised in their country. Credit institutions would have to make annual contributions based on their liabilities, excluding own funds, and adjusted for risk.
The main purpose of resolution funds would be to provide temporary support to institutions under resolution via loans, guarantees, asset purchases, or capital for bridge banks. They could also be drawn on to compensate shareholders or creditors if and to the extent that their losses under bail-in exceed the losses they would have undergone under normal insolvency proceedings, in line with the "no creditor worse off principle".
Member states would be free to choose whether to merge or keep separate their funds for resolution and deposit guarantee schemes (DGSs).
Lending between national resolution funds would be possible on a voluntary basis, as would the mutualisation of national financing arrangements in the case of a group resolution. This remains separate from whatever is eventually agreed with respect to a pan-banking union resolution fund.
Minimum loss absorbency
National resolution authorities will have the discretion to set minimum requirements for own funds and eligible liabilities (MREL) for each institution on a solo basis, based on its size, risk, resolvability, systemic impact and business model. This minimum requirement should be calculated as the amount of own funds and eligible liabilities expressed as a percentage of the total liabilities and own funds (excluding liabilities arising from derivatives) of the institution. A review clause in 2016 would enable the Commission, based on recommendations by the EBA, to introduce a harmonised MREL applicable to all banks.
Although the setting of minimum requirements on a solo basis might be inconsistent with the "single point of entry" (at parent or holding company level) model favoured by the Bank of England, this model could be delivered through a waiver of solo requirements under certain conditions.
Early intervention powers (ie before resolution, and before the appointment of a special manager) have been extended to include the power to require changes to the institution's business strategy; require changes to the legal or operational structures of the institution; acquire all the information necessary in order to prepare for the resolution of the institution; require the institution to contact potential purchasers in order to prepare for the resolution of the institution; and for the resolution authority to contact potential purchasers. Perhaps inevitably, this blurs further the distinction between recovery and resolution.
The list of key elements of resolution planning have been extended to include how institutions plan to meet any minimum requirements for own funds and bail-in liabilities; a description of essential operations and systems for maintaining the continuous functioning of the institution's operational processes; and a description of the impact on employees of implementing the plan, including an assessment of any associated costs.