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How EU Financial Regulation Impacts the Real Economy

How EU Financial Regulation Impacts the Real Economy. Richard Raeburn Budapest 18 May 2012. Overview. The EACT – an introduction Scope of the EU ’ s post-crisis regulatory agenda – and the impact on the ‘ real economy ’ Are we victims of ‘ regulatory capture ’ ?. Recurring themes.

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How EU Financial Regulation Impacts the Real Economy

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  1. How EU Financial Regulation Impacts the Real Economy Richard Raeburn Budapest 18 May 2012

  2. Overview • The EACT – an introduction • Scope of the EU’s post-crisis regulatory agenda – and the impact on the ‘real economy’ • Are we victims of ‘regulatory capture’?

  3. Recurring themes Do regulators fully consider the (unintended) consequences ….and has ‘regulatory capture’ taken place?

  4. Overview • The EACT – an introduction • Scope of the EU’s post-crisis regulatory agenda – and the impact on the ‘real economy’ • Are we victims of ‘regulatory capture’?

  5. EACT introduction • EACT: European Association of Corporate Treasurers • 20 ‘national associations’ – 17 Member States plus Croatia and Switzerland • Associations range from largest (UK) to smallest – the ‘treasury club’ in Finland?

  6. ….EACT introduction • Origins: sharing issues and experience in preparation for Eurozone • Membership later widened to all EU Member State associations • …and then to ‘European’ associations

  7. ….EACT introduction • Two objectives: • Influence regulation and standards development • Share experience – particularly between older associations and the younger ones • Before the 2008 crisis: major involvement in Payments Directive and international accounting standards

  8. Overview • The EACT – an introduction • Scope of the EU’s post-crisis regulatory agenda – and the impact on the ‘real economy’ • Are we victims of ‘regulatory capture’?

  9. Starting point – G20 Sept 2009 • Determination to clean-up the financial system – an understandable ‘crusade’: • Failure to price risk correctly • Asymmetric rewards (bonus culture) • ‘Too big to fail’ • Sector should pay

  10. The regulatory objective Global initiatives are focusing on: • Systemic risk • Activities without added-value • Transparency • Oversight • …..and payback for taxpayer costs

  11. The EU regulatory agenda • OTC derivatives (EMIR) • Bank capital requirements (CRD IV and CRR) • MiFID II and MiFIR • Credit rating agencies (CRR) • Financial Transactions Tax (FTT) • Shadow Banking

  12. Derivatives (EMIR)- outcomes • Principle of end user exemption • Linked to definition of ‘hedging’ • Exemption basedon not breaching the ‘clearing threshold’ • …much still depends on ESMA

  13. Bank capital(CRD IV and CRR) Should welcome Basel III – stronger banking system – foundation for stronger EU and global economies and reduced taxpayer risk

  14. ….but CRD IV /CRR • Could threaten the EMIR exemption by excessive credit charges (CVA) on uncleared derivatives • Orthodox view (UK and elsewhere) – no dilution of Basel III • EP has adopted EACT ‘EMIR read across’ amendment • Debate moves to trialogue

  15. MiFID II and MiFIR • Part of the regulatory push for greater transparency and reduced risks • Exchanges rather than OTC • Intention not to cut across EMIR exemption • …but concerns remain

  16. Credit rating agencies(CRR) • Highly politicised within the EU – perception of poor behaviour by CRAs • Confusion between CRAs role in structured products etc and work for corporate issuers • Issues: rotation; methodology oversight; civil liability; suspension of sovereign ratings; issuer and investor pays models

  17. Real economy impact- what we have learnt • Vital role of European Commission (EC) – early thinking and Green Papers • EC inadequately resourced and lacking relevant experience

  18. ….what we have learnt • EC seems insensitive to real economy impact –proposals seen as for financial sector only • Impact assessments rigid, theoretical – eg overall review model cannot allow for bank disintermediation

  19. Overview • The EACT – an introduction • Scope of the EU’s post-crisis regulatory agenda – and the impact on the ‘real economy’ • Are we victims of ‘regulatory capture’?

  20. Regulatory capture • Financial sector lobbies hard and has huge resources – but ‘over-lobbied’ • Banks – especially investment banks – viewed as ‘toxic’ – no value in corporates associating with them • …but great need for analytical support eg on CVA impact

  21. ….regulatory capture • Real economy poorly represented in EU but generally ‘picks up the tab’ • ‘Regulatory capture’ may be taking place – regulation agenda insensitive to real economy

  22. .…regulatory capture • The EACT has responded: • Monitor and mobilise early on regulatory initiatives • Prepared to work with large corporates when appropriate • Strengthen Brussels presence

  23. Thank you!

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