ICFR Analyses Recent Regulatory Activity

The International Centre for Financial Regulation (ICFR) has published its review of regulatory activity over the summer period. 

The London-based independent organisation comments that four main regulatory themes emerge from research, speeches, consultations and scandals that came out this summer. The first is the ever-increasing pressure on authorities to balance financial stability objectives with a need to allow, or even encourage, the financial system to help ailing economies, as witnessed by the European Central Bank’s (ECB) recently voiced concerns on the liquidity coverage ratio (LCR).

The ICFR says that this pressure is being applied in a period during which financial scandals and alleged malpractices have inflamed public discontent with the role and ethics of the financial system. This has led to more calls not only for more effective supervision and punishment, but also for a more fundamental examination of the role of finance in growth and the broader economy. 

On the London Interbank Offered Rate (LIBOR) scandal, the body says that we may yet see coordinated international work done on benchmarks more broadly.  The perception that some financial development has gone beyond that needed for growth or even beyond broader functions – “socially useless financial intermediation” – has been an important driving force behind the regulatory response to the crisis and the debate about banking structures. It is important to remember, however, that this debate relates to countries where financial development has already reached high levels, and that for many emerging economies the situation is different, with most keen to broaden and deepen their financial systems.

The third theme is the desire for a globally coordinated approach to new financial regulations which is being frustrated by increasing divisiveness in national approaches, resulting on some fronts in serious impediments to progress. This is both because of the practicalities involved, and also because of distinctive domestic agendas which limit cross-border political agreement. Regulation, supervision and enforcement appear as much as ever a weapon in the war for competitive advantage between financial centres. Mexico, which currently chairs the G20, has announced that its leading banks will comply with the Basel capital rules ahead of schedule this September. Indeed, a number of jurisdictions look set to ‘over comply’ with Basel III, either in terms of stricter requirements, or a more rapid implementation timeline.

The ICFR adds that the fourth theme is the intractable crisis in Europe , and that we are likely to see more detail of what a deeper banking union might entail in the Eurozone or wider EU, as countries look to give ground as a quid pro quo for more fiscal burden sharing. Establishing a fully-fledged banking union is a long-term project. However, summer saw the task given a shot of urgency, and the European Commission’s plans are due imminently. The key elements of such a union are broadly held to be: a single supervisor for euro area banks, a single resolution authority, and a region-wide deposit guarantee scheme. Recent reports suggest that the Commission’s proposals will speak largely to the first of these three, with less progress made towards either a resolution authority or a deposit guarantee scheme.

What to Watch For

The ICFR comment that the regulatory world remains active, with a welter of other on-going initiatives with upcoming developments including an ever-growing number of investigations into LIBOR and benchmarks, such as the UK’s Wheatley Review; the UK Parliamentary Commission into banking standards; the EU High- level Expert Group on possible reforms to the structure of the EU banking sector;  the US House of Representatives Financial Services Committee’s request for comments on possible alternatives to the Volcker rule; deadlines on the EU’s iteration of Basel III; negotiations on Solvency II; the Basel Committee’s Fundamental Review of the Trading Book; work on a global Legal Entity Identifier (LEI); consultation on EU guidelines relating to exchange traded funds (ETFs) and Undertakings for Collective Investment in Transferable Securities (UCITs); extension of resolution regimes to cover insurance companies and financial market utilities.

That is the regulatory avalanche facing firms and treasurers wanting to enter the financial markets.

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