6 Financial services: resilience of
credit institutions
| Committee's assessment
| Legally and politically important |
| Committee's decision | Not cleared from scrutiny, further information requested
|
| Document details | European Central Bank Opinion on a draft Regulation to improve the resilience of credit institutions
|
| Legal base | —
|
| Department
Document numbers
| HM Treasury
(36523), 15924/14, —
|
Summary and Committee's conclusions
6.1 In January the Commission presented a draft Regulation
about structural measures to improve the resilience of EU credit
institutions, which we are still scrutinising. This European Central
Bank Opinion on the draft Regulation was requested by the European
Parliament. In its Opinion the Bank seeks to influence and inform
the negotiation, and outlines alternative drafting in the areas
where it has suggested a different approach.
6.2 The Government points out to us two important
reservations it has to the Bank's suggestions.
6.3 We note the Government's reservations and
ask it to inform us about how the Opinion is playing into Council
negotiation of the draft Regulation, as it updates us on that
negotiation.
Full details of the documents:
European Central Bank Opinion of 19 November 2014 on a draft
Regulation on structural measures improving the resilience of
EU credit institutions: (36523), 15924/14, —.
Background
6.4 Shadow banking can be described as non-bank credit
activity conducted by entities that are outside the regulated
system, for example accepting funding with deposit-like characteristics,
performing maturity and/or liquidity transformation, undergoing
credit risk transfer and using direct or indirect financial leverage.
6.5 In 2012 the Commission conducted a consultation
on shadow banking[22]
and the Liikanen Report or Report of the European Commission's
High-level Expert Group on Bank Structural Reform, which recommended
actions in five areas, including mandatory separation of proprietary
trading and other high-risk trading and strengthening bank governance
and control of banks, was published.[23]
In September 2013 the Commission followed up these matters with
a Communication summarising work it had undertaken so far and
setting out possible further actions in this area, including legislative
proposals.[24]
6.6 In January the Commission presented a draft Regulation,
in response to the Liikanen Report, about structural measures
to improve the resilience of EU credit institutions, which we
are still scrutinising.[25]
There are two main elements to the draft Regulation:
· a ban on proprietary trading by certain
categories of credit institution; and
· a requirement for competent authorities
to review credit institutions falling into certain categories
and to determine whether to require them to separate their deposit
taking activities from their trading activities.
6.7 We have recently cleared from scrutiny a complementary
draft Regulation to make securities financing transactions more
transparent, the aim of which is to prevent banks from attempting
to circumvent the rules contained within the draft Regulation
on resilience by shifting parts of their activities to the less-regulated
shadow banking sector.[26]
The document
6.8 This European Central Bank (ECB) Opinion on the
draft Regulation on structural measures improving the resilience
of EU credit institutions was requested by the European Parliament.
The ECB seeks to influence and inform the negotiation, and outlines
alternative drafting in the areas where it has suggested a different
approach. Overall, it welcomes the introduction of a harmonised
methodology across the EU to ban proprietary trading and ring-fence
trading activities, which it believes would limit regulatory arbitrage
and fragmentation of the single market. The ECB then makes some
specific comments including on the role of supervisory discretion
in separation of trading activities decisions, the derogation,
interactions with the resolution authority and the imposition
of sanctions. The ECB also proposes some technical amendments
and requests clarification of the proposal in some areas.
6.9 The ECB:
· argues that, instead of relying largely
on mechanistic rules and procedures, supervisory discretion should
have a greater role in deciding whether there should be separation
of trading activities, and that this assessment should be based
on additional qualitative and quantitative information to that
included in the draft Regulation;
· is particularly concerned about the need
to ensure that the core credit institution should still be able
to carry out market-making trading activity — that is where
the bank acts as a buyer/seller of securities to help supply and
demand of its clients in the market;
· suggests a revised definition of market-making;
· questions the impact of the separation
of trading activities on 'too big to fail', arguing that the trading
activities could still be systemic and that separation could lead
to concentration of trading activity in fewer firms;
· argues that different structural separation
regimes would create fragmentation of the single market, and that
allowing firms under its supervision to operate under different
regimes would limit the effectiveness of the single market;
· supports, therefore, removal of the derogation
(which would permit Member States to apply domestic regimes if
the legislation is already in place and deemed equivalent to the
EU proposal);
· calls into question the legality of the
derogation in the draft Regulation;
· argues, in the context of a draft provision
calling for cooperation between the authority which has the power
to separate the bank (competent authority) and the authority responsible
for resolution to ensure that the separation is consistent with
resolution and recovery plans of the firm, that supervisors need
to be able to jointly decide with the resolution authority on
matters concerning the removal of impediments to resolvability;
· asks for clarification that, whilst resolution
objectives should be considered, a finding by the resolution authority
that no structural change is needed to remove impediments to resolution
should not prejudice the competent authority's proposed ability
to enact separation;
· argues that it should be able to impose
sanctions on banks under the draft Regulation, as it can with
regard to its powers under the Single Supervisory Mechanism (SSM)
— currently, the powers to be conferred on the ECB would
not permit it as much flexibility (specifically the power to sanction
natural persons or imposing sanctions not relating to fines);
and
· argues, due to legal complexity, that
competent authorities should not be able to suspend a bank's authorisation
for failure to comply with the draft Regulation.
The Government's view
6.10 In her Explanatory Memorandum of 10 December
the Economic Secretary to the Treasury (Andrea Leadsom) first
comments that "The ECB opinion is not a proposal for legislation,
nor is it binding on any party, so there are no policy implications".
6.11 The Minister then goes on to say that:
· the Government is already implementing
ambitious bank structural reforms through domestic legislation
— the Financial Services (Banking Reform) Act 2013 and the
secondary legislation made under it;
· these reforms, first recommended by the
Independent Banking Commission chaired by Sir John Vickers, will
safeguard the continuity of core banking services such as deposit
taking and the provision of overdrafts, and ensure that such services
can be separated from investment activities and protected if a
banking group encounters financial difficulties;
· this means that it will be important to
ensure there is flexibility in the EU framework for the UK to
be able to apply its domestic approach;
· the Government strongly supported the
inclusion of a derogation in the Commission's proposal, which
permits this flexibility — however, in its Opinion, the
ECB favours the removal of this flexibility;
· the Government believes that, whilst it
is mainly for those Member States which participate in the SSM
to decide on the ECB request for powers to enforce sanctions on
banks within the SSM, it is not appropriate for the ECB to have
such powers with regards to entities outside the SSM; and
· the Government believes further that as
a matter of EU law such acts of the ECB cannot be binding in relation
to UK institutions.
Previous Committee Reports
None.
22 See (33781), 7988/12: Sixty-fourth Report HC 428-lviii
(2010-12), chapter 6 (25 April 2012) and Sixth Report HC 86-vi
(2012-13), chapter 12 (27 June 2012). Back
23
See the Liikanen Report. Back
24
See (35297), 13426/13: Twenty-second Report HC 83-xx (2013-14),
chapter 24 (6 November 2013). Back
25
See (35781), 6022/14 + ADDs 1-4: Thirty-eighth Report HC 83-xxxv
(2013-14), chapter 6 (5 March 2014) and Second Report HC 219-ii
(2014-15), chapter 5 (11 June 2014). Back
26
See (35780), 6020/14 + ADD 1: Thirty-eighth Report HC 83-xxxv
(2013-14), chapter 5 (5 March 2014), Second Report HC 219-ii (2014-15),
chapter 5 (11 June 2014), Eighteenth Report HC 219-xvii (2014-15),
chapter 2 (5 November 2014) and Twentieth Report HC 219-xix (2014-15),
chapter 5 (19 November 2014). Back
| 
