The last few years have seen tectonic shifts in financial regulation, from mandatory clearing of standardised over-the-counter derivatives to the propagation of a single EU prudential rulebook. New reforms have fundamentally altered how financial institutions structure their operations, pay their staff and interact with customers. But more change is coming thick and fast– with the second half of this year looking as busy as ever.
Under the Latvian Presidency of the Council, Trilogues are underway on the Securities Financing Transactions Regulation, the Payment Services Directive and the Insurance Distribution Directive. The European Parliament is scheduled to consider these legislations in the coming months with the goal of final political agreement by the end of the year. Discussions at the Council are continuing on three politically sensitive dossiers: Money Market Funds, Financial Benchmarks and Bank Structural reforms. In terms of new policy initiatives, the European Commission is mainly focused on plans to establish a Capital Markets Union by 2019. Elsewhere, the bulk of the European Supervisory Authorities’ (ESA) work stems from the technical implementation and application of CRD IV, the Bank Recovery and Resolution Directive, MiFID II and Solvency II. This will prove challenging, particularly given recent budgetary cuts and staff freezes at the ESAs. Already, ESMA has asked for a three-month extension on submitting draft technical standards on MiFID II to the European Commission which will now happen in September.
The Financial Stability Board is working with other global regulators on a co-ordinated work plan to promote central counterparty (CCP) resilience, recovery planning and resolvability. It also plans to prioritise work to address vulnerabilities in capital markets and asset management activities and finalise global standards on total loss absorbing capital (TLAC) in the second half of 2015.
The Basel Committee’s on-going work to restore confidence in capital ratios is looking more and more like Basel IV in disguise. Already, it has published substantial revisions to the standardised approaches for credit, market and operational risk and proposed introducing a capital floor. In the next few months the Committee will undertake further work to finalise these initiatives to improve the consistency of risk-weighted assets through reviews and recommendations. Banks will also need to pay close attention to ongoing reforms, with the Committee planning to take forward the calibration of the leverage ratio before the end of the year.
In addition to new initiatives, regulators (i.e. the Basel Committee and the European Commission) are also planning to take stock of the overall interaction, coherence and calibration of the post-crisis reform agenda to fix errors and address unintended consequences. But, ironically, this review might actually result in more regulations and further changes down the line. This is because new regulations are alerting how financial markets operate and where systemic risks reside. Recently, the International Monetary Fund suggested that risks are shifting away from “banks to shadow banks, from solvency to market liquidity risks, and from advanced to emerging markets”. New regulations are driving these changes and regulators will need to keep on their toes to ensure that in correcting one problem, they don’t create another, and more dangerous, problem elsewhere.