Dr David Doyle, Senior European financial services regulatory advisor, Ernst & Young LLP
David concluded the day with a lively presentation on the possible effect of current political and economic developments on European banks.
The risk of a no-deal Brexit has increased substantially due to the continued struggles to reach an acceptable compromise for all parties. David mentioned that planning for a no-deal outcome is now top of mind for legislators in Brussels. The working assumption of a no-deal outcome had already triggered a raft of temporary equivalency agreements and other European Commission (EC) contingency measures, with legislators’ growing concern being to protect the stability of EU financial markets in the short-term.
Examples of these agreements include recent progress made on centrally cleared and over-the-counter derivatives and fund manager outsourcing and delegation arrangements. However, challenges remain for trading of dual listed securities with the European Securities and Markets Authority (ESMA) pushing strongly to force dual listed European stocks to be traded on EU venues. There is also a challenge to be overcome for third country bank branches and outsourcing of critical activities to the UK.
David briefly touched on the recently published CRR 2 guidance which Nic had also spoken about. He added that the further guidance is expected from the Basel Committee on credit valuation adjustments, environmental, social and corporate governance (ESG) disclosures, Fundamental review of trading book (FRTB) reporting and disclosures and standardized measurement approaches to operational risk.
The project on ESG disclosures, particularly in respect of environmental factors related to climate risk is an important one. Even before the strong performance of the Greens in the recent elections, this was an important point due to the potential for climate risk to disrupt and destabilize financial markets and result in ‘stranded assets’. David’s view is that climate risk is likely to have a far bigger impact on banks than Brexit. At the time of the conference, three out of four key regulatory packages had reached political agreement by the European Parliament (EP) and Council, including publication of the taxonomy classification system which will set the tone for identifying environmentally sustainable economic activities. This could lead to shifts in investment behavior as well as changes in risk profile for the affected industries. Despite the silence of the EU legislators on adjusting prudential treatment for climate change risks and sustainable investments that are aimed at encouraging market transitions to sustainable activities, David believes that such an outcome is highly likely.
European parliamentary elections:
A theme of David’s presentation was the potential impact of the increased representation for Greens which is likely to accelerate the existing ESG projects and lead to further, new projects. The new balance of power within the new EU parliament will change with increased presence of Green, populist left-and-right political groups challenging the traditional center right and left mainstream parties. The decision surrounding the election of a new ECB president is likely to play an important role in galvanizing more ESG-related regulatory changes for banks.
Another aspect which is likely to feature strongly in the new EU parliament is a declining appetite amongst certain (Northern) EU members for further risk-sharing, delaying the introduction of the European Deposit Insurance Scheme (EDIS)and putting more pressure on banks to reduce their non-performing loans (NPLs). The possibility of introducing prudential measures for sovereign debt held by banks cannot be ruled out, as a result.
David concluded by touching on developing issues such as cryptocurrencies, FinTech products and crowd funding and mentioned that Brussels is working on plans to introduce guidelines for these, but that the pace of innovation is overtaking EU-driven regulatory developments in these areas