2-2-2012 Financial Times “Strasbourg hears call for tougher rules for banks”
2-2-2012 Bloomberg “Europe Zero-Risk Capital Rule Should Be Ended, Lobby Group Says”
6-2-2012 EurActiv “Can we come off the rating agency habit?”
9-2-2012 Metro “Do the Big Three deserve credit?”
13-2-2012 Bloomberg “Draghi’s $158 Billion Free Lunch to Boost European Bank Profits”
13-2-2012 Financial Times “Leverage cap has the power to reshape banking”

Deutsch

2-2-2012 Die Zeit “Gewinnt die Bank schon wieder?”
3-2-2012 Suddeutsche.de “Rating-Kritiker Philipponnat Die Abschaffung der Buchstaben”

Francais

3-2-2012 L’Agefi “Finance Watch juge insuffisants les ratios de solvabilité proposés par Bruxelles”
5-2-2012 Dimanche+ “Finance Watch : un début de contre-pouvoir” (Partie 2)
5-2-2012 L’Agefi “Les agences de notation doivent être des analystes et non des juges” (blog par FW)
15-2-2012 Rue89 “Finance Watch, ONG en première ligne face aux lobbys financiers“

2 February 2012: Finance Watch has published its position paper on CRD IV, the European legislation implementing Basel III bank capital reforms.

Key recommendations include:

- higher capital requirements to accommodate maximum harmonisation
- a flexible leverage ratio that measures gross derivatives exposure
- more capital against securitisations
- measures to encourage lending to businesses without credit ratings
- disclosure of risk weight methodologies and return on assets

Frédéric Hache, senior research analyst at Finance Watch and author of the report, said:

“The CRD IV package makes a significant contribution to increasing bank resilience but more needs to be done to address systemic risk and moral hazard. Only if capital requirements are high enough can we say that there is no need for national discretion.”

In addition to higher capital requirements, the report calls for a flexible mandatory leverage ratio of 3% to 5% (33x to 20x) from 2015 to complement the countercyclical buffers already in the draft legislation, with disclosure before then.

“Leverage is a core driver of systemic risk. History has shown the danger of ignoring off-balance sheet leverage, we must not make the same mistake with derivatives. Our leverage ratio proposal is therefore for an IFRS approach without derivatives netting,” said Hache.

The report also recommends a 25% residual risk weight against transferred exposures including securitisations, replacing 100% risk weights for unrated business loans with an average risk weight calculated under IRB for similar businesses (calculated for each country by EBA), greater disclosure of risk weighting methodologies through standard portfolio benchmarking, and a measure to reduce investors’ focus on return on equity by disclosing return on assets among key performance indicators.

The report also comments on governance, liquidity, zero risk weighting, implementation dates and various measures outside CRD IV, including structural separation, supervised deleveraging, the tax treatment of debt, and shadow banking.

Thierry Philipponnat, Secretary General of Finance Watch, said: “Our aim with this report is to promote confidence in the financial system and trust in banks, while ensuring that banks serve society better by focusing on their core function of financing the real economy.”

Full press release as pdf

Finance Watch page on CRD IV

European Commission page on regulatory capital

“CRD IV” refers to a package of draft European legislation comprising the Capital Requirements Directive IV and the Capital Requirements Regulation.

Indicative timeline of the legislative process:

• July 2011 – CRD IV proposal published by the European Commission
• January 2012 – European Parliament rapporteur Othmar Karas (EPP, Austria) presented his draft report
• 27 February 2012 – Deadline for MEPs in the Economic and Monetary Affairs Committee to table amendments
• 13 March 2012 – Danish Presidency plans to reach agreement amongst Finance Ministers (‘General Approach’)
• 25 April 2012 (earliest) – Economic and Monetary Affairs Committee adopts its position
• May 2012 – Compromise negotiations between the institutions
• 11 June 2012 (earliest) – European Parliament plenary vote
• 22 June 2012 (earliest) – Compromise endorsed by Finance Ministers

Finance Watch today gave evidence at a European Parliament public hearing on the European Commission’s proposed reforms of credit ratings agencies. Finance Watch Secretary General Thierry Philipponnat told the hearing that reforms must reduce the financial system’s overreliance on the use of credit ratings.

“At the moment, credit rating agencies are both judge and jury. We must find a way to keep the “judge” role whilst getting rid of their “jury” role,” he said.

Three measures would help to achieve this:

- All references to external credit ratings should be systematically deleted from existing regulations, directives or guidelines (CRD, Solvency, ECB and ESA rules…), as partially reflected in Article 5 of the proposed Regulation.

- Fund managers should be forced to remove all references to credit ratings from their internal rules, strengthening the current proposal to require them “not to solely or mechanistically rely on external credit ratings” (Articles 1 and 2 of the amending Directive).

- The current letter-based ratings system should be replaced with a simple number expressing the probability of default, backed by a narrative text. This could be used to feed the European Rating Index (EURIX) managed by ESMA, as proposed in Articles 11a and 21 of the Regulation and ESMA would compute and publish on its web site the average probability of default.

“The current letter-based ratings system in not just an opinion, it is a verdict. No individual institution should have the power to influence by itself financial markets or economic decisions. We need something altogether more technical and less emotional: a system that would dilute the impact of any one particular rating agency and open the door to competition,” said Mr Philipponnat.

Speech

Press Release

Webstream of hearing

Hearing documents (24-01-2012)

Legislative proposals

7-1-12 General-Anzeigers Bonn “Hinter den Kulissen der Macht”

English

29-1-12 Financial Times FTfm “Widespread belief Mifid II set to fail retail investors”

Francais

23-1-12 www.greenetvert.ft ”Monde : Finance Watch peut-elle assainir le monde de la finance?”

Latvia

25-1-2012 Diena “Finance Watch vadītājs: Bankas zāģē zaru uz kura pašas sēž”
27-1-2012 db.lv “Finanšu stāsta otra puse”
31-1-2012 Diena “Točs: Lūdzu, neregulējiet“

For further details about MiFID, click here. To speak to our MiFID specialist, please call Benoit Lallemand on + 32 (0) 2.401.87.07. For information about Finance Watch, please contact Greg Ford on + 44 (0) 7703 219 222.

EP MiFID Questionnaire – Finance Watch’s response

The directive came into force in 2007 and led to a deregulation of stock markets. Stock exchanges have been put into competition with new alternative trading venues, the latter benefiting from softer rules in particular as regards transparency.

The Commission on 20 October 2011 published a proposal to review the MiFID Directive, and to introduce a separate Markets in Financial Instruments Regulation (MiFIR) to make the requirements more binding and harmonized across member states. This is because a regulation is directly applicable in member states, whereas a directive must be transposed (“implemented”) in national law in all 27 member states.

European Parliament rapporteur Markus Ferber (EPP, Germany) is expected to present his draft position in the Spring of 2012 – negotiations between the institutions will most likely take until the end of 2012. The new rules in the regulation would apply nearly immediately after publication of the agreement; the changed directive will need to be implemented in member states during 2013 and 2014.

Ahead of his draft reports (one on MiFID and one on MiFIR), Mr Ferber issued a working document and a questionnaire to stakeholders. The deadline for responses to the  questionnaire was 13 January 2012; a copy of Finance Watch’s response to the questionnaire can be found at the link below. Finance Watch plans to publish a more detailed position paper on the legislation in the next weeks.

Working Document

Questionnaire – Finance Watch response

For more details, see the European Commission’s MiFID webpage.

(text updated 16 January 2012)

CRD4 would translate into European laws the international standards agreed at G20 level (Basel III). The official goals of the legislation are to “strengthen the resilience of the EU banking sector while ensuring that banks continue to finance economic activity and growth”.

In addition to the implementation of the Basel III agreement, CRD4 also introduces a single rulebook in order to reduce national divergences in legislation. The proposal includes the Basel recommendations from December 2010 on Credit Value Adjustments and Counterparty Credit Risk. The Basel recommendation for additional requirements for large international banks (“SIFI surcharge”) will most likely be inserted through further amendments to the CRD in 2012.

The CRD4 proposal was published by the European Commission in July 2011, and the European Parliament and European Council are currently forming their opinion. If an agreement is reached by the summer of 2012, the rules will start to have an effect by the end of 2013.

European Parliament rapporteur Othmar Karas (EPP, Austria) is working on his draft report, which he aims to complete by 20 January 2012. His colleagues in the European Parliament’s Economic and Monetary Affairs Committee on will then have until 27 February 2012 to table amendments. In the European Council, meetings at attaché and expert level continue with a view to adopting an ECOFIN General Approach in the Spring of 2012.

Full details of the proposals and supporting documents can be found on the Commission’s Regulatory Capital webpage.

(text updated 19 December 2011)

11 October 2011: Finance Watch Secretary General, Thierry Philipponnat, gave evidence on the effects of CRD4 to the European Parliament’s ECON Committee for Economic and Monetary affairs. A copy of his speech is available here. To see a video of the hearing, click here and scroll forward to 15.56 to see Thierry speak.