Wednesday, April 16, 2014

16/4/2014: EU Parliament Passes Bail-ins, SRM and MiFID2


So the EU Parliament voted in the three proposals relating to banking sector 'reforms' in the EU. These included

  1. SRM set up - a EUR55bn Single Resolution Fund to be used as the last line of defence in the future banking crises. Here is an earlier note on how effective that will be in stopping bank runs: http://trueeconomics.blogspot.ie/2013/12/11122013-europe-have-any-firepower-for.html You can see recent assessment of the directive by the IMF and myself here: http://trueeconomics.blogspot.ie/2013/03/1532013-imf-assessment-of-euro-area.html
  2. Bank Restructuring and Resolution Directive - a directive that amongst other things sets the first line of defence at shareholders' bail-ins, followed by debt and depositors' bail-ins. That's right, depositors' bail-ins. And do note, the rabbit hole doesn't stop there - see box out here: http://trueeconomics.blogspot.ie/2014/02/1822014-wither-irish-manufacturing-not.html
  3. Bail-ins are now not just 'on the horizon' but are de jure a law. All depositors over EUR100,000 (the maximum amount for which bank deposits guarantee is allowed) will be at risk. The law requires depositors and bondholders to absorb the second hit to the minimum of 8 percent of total bank's liabilities.
  4. As Reuters recently reported, non-performing loans not covered by provisions currently make up ca 1/3 of equity across the top 20 banks in the euro area. And that is after massive waves of deleveraging, recapitalisations and equity rebuilding that took place since 2008, or over the last 5 years plus. Now imagine the likelihood of the next crisis requiring exhaustion of equity to regulatory minimum and subsequent call on depositors. Pretty darn high. You can read Reuters analysis here: http://www.reuters.com/article/2014/04/15/us-banks-tests-provisions-idUSBREA3E07F20140415 and see this handy infographic: http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=2014_04_14_11_05_b27f82d139834fd1a98af554e6aade90_PRIMARY.jpg
  5. In addition to the above, the Parliament also passed the directive establishing the European Securities and Markets Authority - a Paris-based body in charge of regulating trading and other activities in the markets, and the revamped amended MiFID2. This sets up the basic terms for regulating trading in securities and derivatives and contains new rules for trading commodities, OTC derivatives and HFT. ESMA is now empowered to write some 175 new rules to deploy MiFID2 and the proposals for these are due in May. One key area of regulation will cover HF traders, with all market traders requiring to register as either market participants or HF traders, as well as disclose their strategies.



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