RBS 2012 Annual Report Download - page 288

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Business review Risk and balance sheet management continued
Other risks: Regulatory risk* continued
Shadow banking
Work in this area, which broadly refers to entities and financial
transactions that fall outside the scope of existing financial (banking)
regulation, such as hedge funds, money market funds and structured
investment vehicles, intensified during 2012.
Globally, Financial Stability Board (FSB) workstreams under relevant
bodies including the International Organization of Securities
Commissions and the Basel Committee continued in five key areas:
banks’ interactions with shadow banking entities; ways to reduce the
susceptibility of money market funds to runs; the regulation of other
shadow banking entities on prudential grounds; retention requirements
and transparency in securitisation; and the possible regulation of margins
and haircuts in securities lending and repos. The FSB issued an update
and a further series of consultation papers on certain workshops in
November 2012 and revised recommendations are expected by the G20
St Petersburg leaders’ summit in September 2013.
The European Commission began the first stage in its own regulatory
process on shadow banking in March 2012, with the release of a Green
Paper. A summary of responses published in September 2012 was
broadly aligned with industry views.
Other
Other papers issued during the year covered subjects including risk data
aggregation and reporting; margin requirements for uncleared
derivatives; foreign exchange settlement risk; supervision; financial
conglomerates; and revisions to the securitisation framework.
EU regulatory developments
The EU regulatory agenda in 2012 continued to focus mainly on
prudential and market structure measures. Retail issues also came under
increased focus. Key highlights were as follows:
The Liikanen Review
In November 2011, the EU Commissioner for Internal Market and
Services, Michel Barnier, announced the establishment of a High-Level
Expert Group to consider structural reform of EU banks and in early 2012
it was convened under the chairmanship of Erkki Liikanen, the Governor
of the Bank of Finland. The group was mandated to consider measures to
improve EU banks’ stability and efficiency. In addition to any new
measures, it was tasked to look at ongoing structural reforms, including
the UK Independent Commission on Banking and the US ‘Volcker Rule’.
The Expert Group’s proposals in October 2012 contained five
recommendations: a ring-fence of trading book activities where they form
a significant part of a bank’s activity; effective recovery and resolution
plans (with authorities empowered to require further structural reform if
that improves resolvability); specific ‘bail-in’ instruments (rather than a
general bail-in power applied to existing liabilities); stricter capital
treatment of trading book and real estate exposures; and a number of
corporate governance, risk management and remuneration proposals.
The Commission is considering the Expert Group’s recommendations
and has said that it will formally respond by September 2013. Member
state views on the Expert Group's proposals, where expressed, have
been mixed. The UK is meanwhile pushing ahead with implementation of
its own ring-fencing reforms, as set out by the Independent Commission
on Banking. These go further than the Expert Group's proposals. France
and Germany have also published draft legislation of their own on ring-
fencing, which focus mainly on separating out proprietary trading (but
allowing market making activities to remain within the deposit-taking
bank).
Crisis management and banking union proposals
In June 2012, the EU Commission published proposals for an EU-wide
recovery and resolution regime, providing for banks and authorities to
maintain plans for each firm, setting out measures to set right or resolve
businesses should they face difficulties. Authorities would receive a
number of powers to intervene in banks for these purposes, including
early intervention powers ahead of problems coming to light, and a
minimum set of tools to restructure or wind up a failed firm.
Among the new tools is the power to ‘bail in’ senior creditors when
resolving a firm, to ensure losses are spread among shareholders and
creditors, without recourse to tax-payer funding. Bailed-in creditors take a
loss and become shareholders in the new entity created.
These proposals are likely to be agreed in 2013, with member states and
banks in compliance from 2015, and bail-in provisions from 2018.
Notwithstanding these developments, the euro-area crisis continued to
develop and in July 2012, the President of the European Council,
Herman Van Rompuy, set out a road-map for further euro-area financial
integration. This aims to both resolve the current crisis and tackle
longstanding structural problems in the single-currency zone.
Fundamental to these proposals are banking and fiscal union and further
economic integration. The President’s banking union proposal comprises:
a Single Supervisory Mechanism; and mutualisation of bank losses
through common deposit guarantee and resolution funding
arrangements. The latter two elements are planned to follow agreement
of the recovery and resolution regime in 2013.
In September, the Commission published its proposal for a Single
Supervisory Mechanism, designating the European Central Bank (ECB)
as primary prudential supervisor for all euro-area banks, with opt-ins
available for EU member states outside the euro-area. The Council of the
EU agreed to these proposals, with the proviso that the ECB would
directly supervise only larger banks and those in receipt of state aid,
while retaining some oversight of smaller banks that fall under the remit
of national supervisors.
The European Parliament is now considering the proposals, with
agreement expected in early 2013. The ECB will not acquire full
supervisory authority until March 2014 and there is scope to delay this.
Operational elements, such as how the ECB will be staffed, how it will
interact with national supervisors and how it will implement its new
macro-prudential responsibilities, remain to be seen. More detail should
emerge during 2013.
*unaudited