Reflections on regulatory developments
January 2013 | MARKET OUTLOOK 2013
Financier Worldwide Magazine
The pace of regulatory change continued unabated in 2012. One of the major European measures in response to the financial crisis has been the CRD IV package of reforms which will implement Basel III.
CRD IV consists of an EU directive and a regulation. The regulation will be directly applicable and takes the form of a single rulebook for prudential supervision of investment firms and banks throughout the EEA. At time of writing, there are two versions of the draft regulation (known as the Capital Requirements Regulation or CRR) in circulation, following the work of the European Council in debating the first draft issued by the EU Commission in July 2011. As a result, it remains to be seen what characteristics capital instruments will ultimately require to have in order to be eligible for inclusion in firms’ capital resources. A particular point of uncertainty is the definition of tier 2 capital. The Basel III proposals, as published by the Basel Committee on Banking Supervision, indicated that tier 2 instruments should include a feature which would cause them to convert to equity or be written down at the point of non-viability of the institution. This characteristic did not appear in the Commission’s draft regulation but an amendment has been proposed in the course of discussion at the European Council which would align the text of the CRR with that of the Basel III proposal. In effect, this is not necessary as there are other EU proposed measures for the resolution of banks which will impose such bail-in in the event of insolvency. However, in advance of a vote of the European Parliament in plenary session to finalise the CRR, industry participants must live with the uncertainty. This is particularly troublesome given capital instruments which do not conform to the CRR will be phased out at the rate of 10 percent per annum once the CRR is implemented. In view of the timetable to implementation, firms may have very little time to issue replacement capital instruments, should the need arise, and the difficulty associated with raising capital for banks and other investment institutions will be reflected in the likely pricing of such replacement capital instruments.
Although the deadline of 1 January 2013 will not be realistic at this stage, the Commissioner Barnier is determined to implement CRD IV as soon as possible thereafter. The premium on capital availability will likely drive disposals of non-core assets and some merger and acquisition activity once the measures are implemented. It will be interesting to see what happens in the course of 2013.
On the UK domestic front, the financial services industry will additionally have to cope with the break up of the Financial Services Authority and the transfer of its remit to two new regulators: the Prudential Regulatory Authority, which sits in the Bank of England and the Financial Conduct Authority. The onset of twin-peaks regulatory oversight will no doubt add to the woes of the industry in these economically trying times.
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