Revision of "Bâle II" Directive gets green light in European Parliament - CAD4 arrives
Thursday, 7 May 2009 | 
John A Morrison
Brussels, 06/05/2009 (Agence Europe) - On Wednesday 6 May, MEPs debated two legislative proposals in the field of financial services: - proposed directive revising requirements in terms of capital for banks; - proposed decision establishing a Community funding programme for the activities of the three European committees of national regulators (CESR, CEBS, CEIOPS). In their support for the recommendations of each respective rapporteur, they have paved the way for these two legislative acts to be adopted at first reading before the end of the term in office.
Bâle II. "We have agreed on new measures" which this time go beyond the lowest common denominator, said Othmar Karas (EPP-ED, Austria), rapporteur on the proposed "Bâle II" directive on requirements for own funds of credit companies (EUROPE 9893). Amongst other things, the legislative proposal brings in a minimum level of securitised assets which banks must keep on their balance sheets, so that they are obliged to guarantee the quality of the financial instruments which they resell on the market in the form of securities. These highly complex financial products, to which it is difficult to put a monetary value, such as securities backed by high-risk mortgages, have contributed to the spread of the financial crisis worldwide and caused heavy losses among many banks, which have been obliged to turn to public aid to avoid bankruptcy. Lastly, MEPs gave their approval to the compromise which sets at 5% the retention rate for securitised assets and rejected amendments favouring a higher level: German MEPs of the EPP-ED were calling for 10%, the Greens/EFA 15% and the GUE/NGL 20%. By the end of this year, the Commission is to report back on the effects of the new rules and, if necessary, propose to tighten them up, in the light of, in particular, an opinion of the Committee of European Securities Regulators (CESR).
During the debate, most of the MEPs voiced their satisfaction at an agreement which, although far from ideal, marks a stage in the ongoing reform of European legislation on the financial sector, particularly financial supervision. On the issue of securitisation, there was "a debate on the proportion which must be held in own funds", said Mr Karas. The Commissioner for the Internal Market, Charlie McCreevy, who was pleased with proceedings, stated that the Commission still had reservations on this issue. He congratulated the EP on having resisted attacks from the industry on the introduction of a provision which he feels is "essential" to reinforce the stability of the financial markets. "We will see whether we need to increase the requirements for the retention level" when this provision is reviewed at the end of this year, he added. He went on to warn the banks to be prepared in future to constitute more own funds, which is the only way out of the current crisis of confidence. "10%" of securitised assets held "would be far more justified", said Werner Langen (EPP-ED, Germany), supported by Udo Bullmann (PES, Germany). Concerned that the hasty adoption of the directive could bring about new problems, John Purvis (EPP-ED, UK) expressed his disagreement with the requirement for a minimum level of securitised assets held, which would "slow recovery on the credit markets", and with limiting a bank's exposure to the risks of just one consideration to a level of 25% of its own funds, which "will make things complicated". British Liberal Sharon Bowles is convinced of the importance of the securitisation market, which "in recent years consisted of 800 billion in securitised loans, which may have been mortgages, car loans, consumer loans and even loans to SMEs".
Deploring the absence of the Czech Presidency, Pervenche Berès (PES, France) criticised Mr McCreevy's attitude, opposing regulatory intervention negated by the financial crisis at the end of this legislative period. "Fortunately, we won't be working with you any more!", she said. Her Dutch counterpart Ieke van den Burg called for the creation of a portfolio dedicated solely to financial services in the next European Commission. Zsolt László Becsey (EPP-ED, Hungary) spoke in favour of the systematic creation of "colleges" for the cross-border financial institutions.
THE COMMENT TO THIS POST BELOW IS POSSIBLY FAR MORE 'ANALYTICAL' THAN THE SIMPLE EXPOSITION ABOVE
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Comments
Comment on Proposed BCBS Capital Standards
Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy
The Brookings Institution
LINK to article
Basel rules must address shortfalls of the past
Hugo Banzinger, Deutsche Bank CRO in the FT
Banks call for Basel III rewrite
From "Risk dot Net", Have we got time for this? "Quibbling with QIS", isn't this exactly what happened the last time, Spreadsheet jockeys running the world? http://www.risk.net/risk-magazine/news/1603572/banks-basel-iii-rewrite-qis-exercise
'CRD IV' is now an official name!
Financial crisis response: Commission asks stakeholders for views on further possible changes to Capital Requirements Directive ('CRD IV')
Link to europa
The seven areas of potential action are as follows:
Liquidity standards: Introducing liquidity standards that include a liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio.
Definition of capital: Raising the quality, consistency and transparency of the capital base.
Leverage ratio: Introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework based on appropriate review and calibration.
Counterparty credit risk: S trengthening the capital requirements for counterparty credit risk exposures arising from derivatives, repos and securities financing activities.
Countercyclical measures: A countercyclical capital framework will contribute to a more stable banking system, which will help dampen, instead of amplify, economic and financial shocks.
Systemically important financial institutions: The Commission is consulting on appropriate measures to deal with the risk posed by such institutions.
Single rule book in banking: The Commission is consulting on areas where more stringent requirements might be necessary. In addition, the Commission is consulting on the appropriate prudential treatment of real estate lending. This is part of the Commission's commitment to create a single rule book in Europe.
European Commission consults on supplementary CRD amendments
On 27 July 2009 a consultative working document was published by the European Commission Services. The purpose of this document is to obtain views on further proposed amendments to the Capital Requirements Directive (2006/48/EC and 2006/49/EC) (CRD).
The proposed amendments would:
Implement the commitments contained in the European Commission Communication of March 2009, and
Supplement CRD amendments that have been adopted or proposed at European level.
CRD amendments in four areas are listed in the document:
Through-the-cycle expected loss provisioning
Specific incremental capital requirements for residential mortgages denominated in a foreign currency
Removal of national options and discretions in the CRD
Simplification of the Bank Branch Accounts Directive (89/117/EEC)
There are certain areas where the Commission Services would particularly welcome comments, questions on these areas have been set out in the document. The closing date for comments on this is 4 September 2009.
European Parliament debate on CAD3 The Future of Securitisation
“5% of something is better than 55% of nothing” McCreevy
This (above, click link) is the speech of Charlie McCreevy of 6th May, to the European Parliament. [That is May 2009!]
How many people do you really know who would understand the point of it? I thought I would bring it to the attention of our many followers & put it on the record for my own purposes, since no-one else is reporting it.
It’s McCreevy's speech to the European Parliament prior to their votes on his bill, at a first reading, legislating the budgets of CEBS etc (the 3L3), EFRAG (the accounting standards body) etc & effecting the change to CAD3 (Euro Basel II) to legislatively require first loss provision retention @ 5% in securitisation. This retention was initiated at 15% but “bargained out” by the industry and the Commission to 5%.
Note the parliament did not vote on his proposals on ratings agency reform at this session; this is the last meeting of the parliament before the elections in June.
Clearly Charlie believes that supervision is about reporting, it’s not a process, its not a pompous thing run by important people or huge bloated agencies of the European Executive, its about transparency to him (an interesting position). I hadn't seen it that way before; I don’ think Charlie has made his own philosophy on this so clear before. It reflects his professional background. Personally I think this is brilliant. After he leaves Brussels, would Charlie not be the optimal first chairman of NAMA in Dublin? Charlie got a hammering from some of the MEPs for bringing forward this legislation as “too little too late”; posturing of MEPs in my view; what Mr. McCreevy has achieved is simply ‘awesome’! As Charlie argued himself, this is a first step in a long process. McCreevy and his staff had pushed this through in a rapid expedited process which had begun on Monday night (I think I smell the cigar smoke!) and went on through Wednesday morning; ‘Trilog’ is the Euro-technical term, the agreement was reached one hour before the vote in the parliament...
There had been some extreme tension on the parliament floor over the scale of the legislatively required 1st loss provision retention in issued securitisation, with a French lobby speaking up the requirement to 20%; Beres Perveche MEP made it clear that she believes that the expedited process Charlie had used to get this legislation through this week was too fast for her. She was supported by a German MEPs arguing to lift the retention number to 10%.
But Perveche did make it clear that the European parliament will address in the session immediately after the elections enabling legislation to bring forward European institutional changes to provide a basis for “Clearing Houses” for Credit Default Swaps and “Derivative Securities”. The retention figure will be reviewed at year end 2009 again by the parliament under a new European Commission in which the role of the Commissioner vis a vis Banking Supervision will possibly be made more specific, potentially with a dedicated Commissioner for Banking Supervision!
One English MEP (UK Liberal) Sharon Bowles described the Credit Crunch as a problem of the ‘Buy Side’ in the United States!!! Bowles though made a very astute speech, clarifying a debate which I myself have had with senior officials of the Commission; clearly the argument about whether securitisation activity should be legislated out of existence or not, has been settled at a policy level both in the parliament and the Commission. This is the first hint of more policy (and consequent enabling legislation) to come in that space, possibly including enabling legislation, similar to the CDS market initiative; clearly the Commission (and the parliament) have fully realised that Europe is dead without a wholesale Credit Market, i.e. a market in Structured Products but what we are going to see is a European ‘joined up’ market subsuming the unique German Pfandbreiefe process into common standards of supervision, transparency and market operation in Europe for Structured Products and Wholesale Credit Markets. This is no small task! An immediate impact (although this was not explicitly discussed) will be that the use of offshore centres specifically for the issuance of Covered Bonds like Dublin’s IFSC is big-time history, in that sense Charlie is ever present; whatever he giveth, he has the power to taketh away!
Bowles argued specifically and immediately that Europe cannot continue without a wholesale credit market, she brought the logic down to brass tacks of car loans and SME loans; she argued from the perspective of the citizen. She knows what she is talking about. Her emphasis was upon the supervisory role as that of a “Quality Control Process”, the retention figure being part of that; a hint that unless an originating institution had an own funds ratio higher than 25% it may not be able to participate in the new market. She also made a focus of proportionate penalties in terms of capital costs should an originating institution fail due diligence tests. Bowles made the point of why McCreevy was seeking budget for the 3L3 committees and EFRAG; “intelligent supervision” is fundamental to enabling a market sine qua non to the economic health of Europe!
John Purvis the English Tory MEP was the token voice still arguing that the first loss retention should be zero; how quickly one can become a dinosaur post credit crunch.
Reading between the lines, what I had not realised was that it is the position of the McCreevy DG that 5% is NOT ENOUGH & not only that, the DG wanted to legislatively require the formulaic calculation of 1st loss (presumably by enforcing the Gordy formula in law but Charlie indicated that was being worked on between Basel and Brussels) - McCreevy makes it clear in this speech that he has not let that one go yet.