UK FINANCIAL REFORMS - Milken Institute · UK Financial Reforms: Bank of England 2.0 Claude Lopez and Elham Saeidinezhad A few months ago, we produced a timetable for the implementation

Claude Lopez and Elham Saeidinezhad

Decem

ber 2016

UK FINANCIAL REFORMS:Bank of England 2.0

ACKNOWLEDGMENTSThe authors would like to thank Jonathon Adams-Kane, Keith Savard and Jakob Wilhelmus for helpful discussions related to this paper.

ABOUT THE MILKEN INSTITUTEThe Milken Institute is a nonprofit, nonpartisan think tank determined to increase global prosperity by advancing collaborative solutions that widen access to capital, create jobs, and improve health. Wedo this through independent, data-driven research, action-oriented meetings and meaningful policy initiatives.

©2016 Milken InstituteThis work is made available under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License, available at http://creativecommons.org/licenses/by-nc-nd/3.0/

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UK Financial Reforms: Bank of England 2.0

ClaudeLopezandElhamSaeidinezhadAfewmonthsago,weproducedatimetablefortheimplementationofU.S.financialreformundertheDodd-FrankAct.1Oneofthemainobservationswasthatthelegislationdidlittletoconsolidateregulationoutsideofbanking.Incontrast,theanalogousUKreformlegislation,theFinancialServicesAct,madetheBankofEngland(BoE)thecenterofUKfinancialandmonetarystability.A2016amendmentconfirmedandstrengthenedthebank’srole.However,asignificantnumberofUKfinancialrulesarebasedonEuropeanUnionregulations,andcurrently,asamemberofthesinglemarket,theUKissubjecttothem.ThatmembershipalsohasgivenBritainavoiceinEUrulemakingthroughrepresentationinboththeEuropeanParliamentandtheCouncilofMinisters.TheUKimplementsEUruleseitherbytransposingEUdirectivesintoBritishlaworbydirectlyenforcingEUregulations.Thesedifferencesareimportant,especiallyasBritainandtheEUpreparefortheapproachingBrexit:Tomaintainthecurrentregulatoryframework,theUKwillhavetotransposealltheEUregulationsintoitsnationallaw.ThisisevenmoreimportantnowwiththeEU’sincreasedusageofregulationsasthefinalstageoftheBaselIIIaccord’simplementationapproaches.Furthermore,theEU’sregulatoryframeworkitselfisaworkinprogress,withkeydeadlinesin2018and2019.ForsakingEUmembershipwilllimittheUK’sabilitytoinfluencethisprocess,althoughitmaybeobligatedtofollowtherulesthatresult,becausetheyaremostlydrivenbyinternationalregulatoryeffortsthatincludenon-EUcountriessuchastheU.S.Beforeassessingthesechallenges,thispaperestablishesatimelinesummarizingthestatusoffinancialregulatoryreformintheUK.Itthenidentifiessomeoftheforthcomingdifficulties,includingBrexitandtherecentevolutionofmacroprudentialpoliciesamongdevelopedcountries.

Milestone Timeline InresponsetotheglobalfinancialandEuropeansovereigndebtcrises,aswellastheLiborscandal,theUKfundamentallyreformeditsregulationoffinancialservices.Thisnewframework,presentedintheFinancialServicesAct2012,makestheBankofEnglandresponsibleforfinancialstabilityandplacesastrongemphasisonmacroprudentialpolicy.Monitoringsystemicallyimportantinstitutions,markets,

1LopezandSaeidinezhad(2016).

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andactivitiesisatthecoreoftheact,theUKimplementationoftheBaselIIIaccord.2Theactfocusesonfourmainissues:strengtheningfinancialstabilityviaenhancedprudentialrules;identifyingandmonitoringsystemicallyimportantfinancialinstitutions(SIFIs)andprovidingorderlyresolutionwhennecessary;increasingconsumerprotectionandpromotingcompetition;andenhancingtheintegrityofmarkets,includingderivativesdealingandpensionfundactivities.

Table1,onpage10,showsthegoalsandimplementationdatesofthemainregulatorychangesintheUKWediscussthesechangeschronologicallybelow.2012Asnoted,2012wasaturningpointfortheUKregulatoryarchitecture.TheFinancialServicesActcompletedtheregulatorystructuralreformbyabolishingtheUKFinancialServiceAuthorityandcreatingthreenewfinancialregulators:theFinancialConductAuthority(FCA),thePrudentialRegulationAuthority(PRA),andtheFinancialPolicyCommittee(FPC).AsshowninFigure1,theBoEhousesthePRAandtheFPC.Thenewregulators’missionistoidentify,prevent,and,ifnecessary,respondquicklytofinancialstabilityissues.

Figure1.RegulatoryArchitectureofUK

2http://www.bankofengland.co.uk/financialstability/Pages/default.aspx.

FinancialPolicyCommittee

Policyrecommendation

PrudentialRegulationAuthority

FinancialConductAuthority

InvestmentfirmsandotherfinancialservicesthatarenotdesignatedbythePRA,suchasinvestmentexchanges,insurancebrokers,andfundmanagers

Banks,buildingsocieties,creditunions,insurers,andmajorinvestmentfirms

Financialmarket

infrastructures

BankofEngland

Conductregulation

Prudentialandconductregulation

Prudentialregulation

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2013UndertheauthorityoftheFinancialServices(BankingReform)Act,thegovernmentimplementsseveralnewbankingregulations,manydrivenbyBaselIII.Asaresult,theBoE/PRAusessize,interconnectedness,complexity,andbusinesstypeascriteriatosortallnationaldeposit-takers,investmentfirms,andinsurersintofivecategoriesreflectingtheirpotentialimpactonthefinancialsystem.Regulatorystringencyisbasedonthedegreeofriskposedbyeachcategory,withthefirstcategoryconsistingofinstitutionswhosefailurewouldsignificantlydisrupttheUKfinancialsystem.3Theconceptof“ringfencing”isintroducedthisyear.Largedeposit-takersshouldring-fence,orinsulate,theirinvestmentbankingactivitiesfromtheirretailoperations.IncontrastwiththeVolckerRuleintheU.S.,theUKapproachdoesnotrequirering-fencedbodiestobeaseparatelegalentityfromthegroupthatengagesinexcludedactivities.Instead,theymustbesufficientlyindependentofthisgroup.However,itisonlyin2016thattheBoE/FPCprovidesomeguidanceregardingringfencing’simplementation,with2019beingthetargetimplementationdate.

Furthermore,keyEUdirectivesandregulationsstartbeingtransposed,orconvertedintoBritishlaw,andimplementedtoimprovemarketintegrityandsecuritydealing.TheseincludetheEuropeanMarketInfrastructureRegulation(EMIR),whichregulatesthederivativesmarket,inparticularOTCderivatives,centralcounterparties(CCPs),andtraderepositories;theAlternativeInvestmentFundManagersDirective(AIFMD),whichregulateshedgefunds,privateequity,andrealestatefunds;andtheFinancialConglomeratesDirective,whichfocusesonlargefinancialgroupsactiveindifferentfinancialsectors,oftenacrossborders,andpromotesconvergenceinnationalsupervisoryapproachesandbetweensectors.TheBoE,inchargeofthesupervisionoffinancialmarketinfrastructure(FMI),reliesondirectlyapplicableEUregulations,accompaniedbybindingtechnicalstandardsforthesupervisionofCCPandsecuritiessettlementsystems.4

Finally,twoothernotablereformsfocusonconsumerprotection.TheMortgageMarketRulegivestheFCApowertoregulatemortgageactivityandtoactuponpoorpracticeswheretheyemerge;theTemporaryProductInterventionRuleempowerstheFCAtointervenetemporarilyinthefinancialmarketifconsumerprotectionisneededurgently,withoutseekingpubliccomment.2014In2014,theBoE/FPCimplementsthesecondphaseoftheSIFIsframeworkandpublishesthefirstresultofstresstestingfortheUKbankingsystem.5

Furthermore,financialgovernancewithintheEUisstrengthenedandharmonizedbythecreationofa“singlerulebook,”whichappliestothefinancialsectoracrosstheentireEuropeanUnion,withtheaim

3TheBoE/PRAprudentiallysupervisebanks,insurersandsystemicallyimportantinvestmentfirms.TheFCAisprudentiallysupervisorofallotherfinancialfirms.4TheseUKandEUregulationsandstandardsinturnfollowglobalstandardsdrawnupbycentralbanksandsecuritiesmarketregulatorsworkingtogetherthroughtheCommitteeonPaymentandSettlementSystems(CPSS)andtheInternationalOrganizationofSecuritiesCommissions(IOSCO).5TheCommitteeofEuropeanBankingSupervisorsranEU-widestresstestsin2009and2010.Startingin2011,theEuropeanBankingAuthorityhasbeenrunningEU-widestresstestseverytwoyears.

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ofenhancingfinancialmarkettransparencyandintegrity.Theprovisionsofthesinglerulebookaresetoutinthreemainlegislativeacts:

! CapitalRequirementsRegulationandDirective(CRDIV),whichimplementstheBaselIIIcapitalrequirementsforbanks.TheCRDmustbeimplementedthroughnationallaw,whereastheCapitalRequirementsRegulation(CRR)isdirectlyapplicabletofirmsacrosstheEU.6

! BankRecoveryandResolutionDirective(BRRD),whichestablishesaharmonizedframeworkfortherecoveryandresolutionofcreditinstitutionsandinvestmentfirmsfoundtobeindangeroffailing.

! DepositGuaranteeSchemeDirective(DGSD),whichregulatesdepositinsuranceincaseofabank’sinabilitytomeetitsliabilities.

CRDIVwasimplementedintheUKin2014andDGSDandBRRDwereimplementedin2015.TheFinancialStabilityInformationPoweralsoenablestheBoE/PRA“torequireapersontoprovideinformationordocumentsrelevanttothestabilityofoneormoreaspectsoftheUKfinancialsystem."7Atthesametime,theFCAexpandeditssupervisoryauthoritytoallfirms,financialornonfinancial,thatprovideconsumercredit.Italsopusheslegislation,suchastheClientAssetsRegimeforInvestmentBusiness(CASS),toimprovecompetitionandregulatorytransparencywhileprotectinginvestors.82015In2015,theBoE/PRAandFCApublishtheirfinalrulesregardingthelaststepoftheSIFIsframework:recoveryandresolutionplanning.TheSIFIssupervisionisextendedtotheinsuranceindustryattheEuropeanlevel,withtheimplementationoftheSolvencyIIDirectivescheduledfor2016.Inanticipation,theBoE/PRAperformsthefirstgeneralinsurancestresstesting.9

SeveralmajorEUrules,mostlyrelatedtoconductinanefforttoincreasetransparencyandinvestorandconsumerprotection,aretransposedintoUKlaw.TheseincludetheMarketsinFinancialInstrumentsDirectiveII(MiFID),which,withtheaccompanyingRegulationMarketsinFinancialInstrumentsRegulation(MiFIR)andtechnicalstandards—collectivelyMiFIDII—buildonandextendthescopeofMiFIDIthatcreatedasinglemarketforinvestmentservicesandactivities.10However,itsimplementationdateislaterdelayedto2018.6MostcapitalrequirementaspectsofCRDIV,suchasminimumcapitalrequirementsandcapitalbufferrequirements,havealreadybecomebindinglegislation.Liquidityrequirements,i.e.,theliquiditycoverageratio(LCR)andthenetstablefundingratio(NSFR),arestillaworkinprogress,withfullimplementationplannedby2018.Leverageratiosareexpectedtobereportedbytheendof2016,withlegislationtomakeitabindingmeasure—ifnecessary—asof2018.7PrudentialRegulationAuthority(2014,p.3).8TheUKTreasurytransferredcreditconsumerregulatoryauthoritytotheFCA.Whilemostoftherulestookeffectin2014,thetransitionalperiodforcertainprudentialrequirementsondebtmanagementendsin2017.9TheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)starteditsfirstsetsofEU-widestresstestsin2011.ItgrewtobepartoftheimplementationofSolvencyII,in2015,andincluded50%ofinsurancecompaniespercountry.Startingin2015,PRAconductsageneralinsurancestresstestexerciseforallCategory1and2UK-regulatedgeneralinsurersaspartoftheact.Additional,majorUKinsurersgothroughEU-wideEIOPAstresstests.10https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir.11UCITSValsoharmonizestheadministrativeregimesformutualfundsacrosstheEU.

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2016Manyofthe2016changesfocusonimprovingmarketintegrityandincreasingconsumerandinvestorprotection.Theimplementationofpensionreformsforcessignificantchangesinthepensionsandretirementincomemarket.ThereformsreflecttheFCA’sgoalofensuringthatconsumershaveaccesstoproductsandservicesthatarewellgovernedanddelivervaluewithinopen,competitive,andinnovativemarkets.Thereformsrequirefirmstomakesignificantoperationalandtechnicalchanges.Thisperiodofchangewillcontinuein2017withtheintroductionofasecondaryannuitymarket.

OtherchangessuchastheSeniorManagersRegime,SeniorInsuranceManagersRegime,andUndertakingsforCollectiveInvestmentinTransferableSecuritiesDirective(UCITSV)focusonstrengtheningpersonalaccountabilityforthemanagementofdesignatedfirms.11TheBankofEnglandandFinancialServicesActexpandsthenotionofenhancedaccountabilitytoallfirms.ThislastpieceoflegislationconfirmsandreinforcesthecentralplaceoftheBankofEnglandintermsofmonetaryandfinancialstability.

The Road Ahead Nearlyadecadeaftertheglobalfinancialcrisis,theimplementationofUKfinancialreformremainsaworkinprogress.Furthermore,recentinternationaldevelopments,fromBrexittothepotentialofdivergingmacroprudentialandmonetarypolicyamongleadingeconomies,suchastheU.S.andEurope,threatentoweakenresolvetoimplementworldwidecoordinatedfinancialpolicy.

Asnotedabove,implementationdatesareapproachingformanyoftheregulations.Forbankingreform,thelaststepoftheSIFIsapproach,recoveryandresolution,requirestheBoEtoestablishtheMinimumRequirementforOwnFundsandEligibleLiabilities(MREL)regimetoensurethatfirmshavesufficientcapacitytoabsorblosses,sothattheirfailurewouldnotdisruptthelargereconomy.InNovember2016,theBoEsetMREL’stechnicalstandardsandextendedfullimplementationto2022,withtheexceptionof“globalsystemicallyimportantbanks,”whichmustmeettheFSB’stotalloss-absorbingcapacityby2019.Implementationofthering-fencingrulealsoisplannedfor2019.

Similarly,forthenonbankingsector,majorreformseitherhaveaforthcomingimplementationdateorarestillatanegotiation/designstage.TheEuropeanmoneymarketfundreformhasyettobecomelaw,whilesignificantreformstostabilizeactivitiesinthecapitalmarkets,suchasEMIRandMiFIDII,areaworkinprogress;althoughEMIRhasalreadycomeintoforce,technicalrequirementsthatarekeytoitsimplementationaren’tcomplete.Furthermore,theimplementationdateforMiFIDIIhasbeendelayeduntilJanuary2018.Thesetworegulations,combinedwiththeCentralSecuritiesDepositoriesRegulation(CSDR),arethethreepillarsofaframeworktoregulatesystemicallyimportantsecuritiesinfrastructures.CSDRcameintoforcein2014;however,manyoftherequirementswillnotapplyuntiltechnicalstandardsbecomeUKlaw.Finally,whilecentralcounterparties(CCPs)aretheformoffinancialmarketinfrastructure(FMI)thathaveattractedthemostattentionfromregulators,securitiessettlement

11UCITSValsoharmonizestheadministrativeregimesformutualfundsacrosstheEU.

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systemsarekeytoreducingcreditandliquidityrisk,especiallyduringmarketdistress,andverylittlehasbeendonetoaddresstheproblem.12

ThetimingoftheseimplementationscoincideswiththetimelineforBrexit.Asnotedabove,theUKregulatorysystemreliesheavilyonEUrulesthat,asanEUmember,theUKhelpeddesign.BeyondremovingtheUK’svoiceandexpertiseininfluencingfuturepolicies,Brexitwillhaveadirectimpactonexistingprocesses.Theseinclude“passporting”andclearingeuro-denominatedderivatives.ChangestoeithercouldcausesignificantdisruptionforboththeUKandEU.

Passporting:Thisreferstotheabilityofanyfinancialfirmregisteredinoneof28EUstates,plusIceland,Liechtenstein,andNorway,tooperatethroughouttheentireregionwithoutanyadditionalauthorization.Furthermore,itmakestheprocessmoreefficientthankstofeaturessuchashomestatesupervision,whichreducesregulatoryburdens.Italsoallowsexemptionsfromlocalregulatorydepositrequirements,whichdecreasecostsbyenablingBritishfirmstorunrelativelylargeinternationalbusinessesasbranchesratherthanasseparatelycapitalizedsubsidiaries.PassportingisessentialtosomeofthecurrentregulationssuchasMiFIDandCRDIV.Itsdemisewouldhaveasignificantimpact,especiallyforbanking,sinceaboutafifthoftheUKbankingsector’sannualrevenuedependsonit.13Ascurrentlydefined,passportingrightsarelinkeddirectlytoEUsingle-marketmembership,againwiththeexceptionsofNorway,Iceland,andLiechtenstein.

Euro-denominatedderivativesclearing:About75percentofEuropeantradingineuro-denominatedinterest-rateswaps,amajortypeofderivative,takesplaceintheUK,comparedwith13percentinFranceand2percentinGermany.14In2015,theEuropeanCourtofJusticestrengthenedLondon’sroleinderivativesclearingbyrulingagainsttheEuropeanCentralBank(ECB)requirementforCCPsinvolvedinsecuritiesclearingtobewithintheeurozone.Thecourtspecifiedthat“theECBdoesnothavethecompetencenecessarytoimposesucharequirement”andthatlocationwasnotarequirementoftheTreatyonFunctioningoftheEuropeanUnion.15BesidestheexpertiseofclearinghousessuchasLCH,akeycomponentforthisrulingwastheUK’smembershipintheEU.

Finally,thesuccessoffinancialregulationinmitigatingsystemicriskultimatelyreliesoninternationalcoordination.Suchcoordination,andsubordinationofnationalspecificities,cameeasilyamidtheurgencyofthefinancialcrisisanditsimmediateaftermath.Sincethen,differingratesofrecoveryandtheexpectationofdivergingmonetarypolicieshaverefocusedregulators’attentionontheircountries’individualneeds.

Divergenceinmacroprudentialpolicyandinternationalcoordination:Theerosionofinternationalpolicycoordinationisparticularlynotableinbanking.InthedaysfollowingtheBrexitvote,theBoE/FPC

12Thesystemhelpsensurethatpaymentsaccompanydeliveriesofsecurities.Ittherebyreducesliquidityriskandcreditriskbydecreasingthechancethatdeliveriesorpaymentswouldbewithheldduringperiodsoffinancialstress.13ScarpettaandBooth(2016)estimatethataroundafifthoftheUKbankingsector’sannualrevenuedependsonpassporting,comparedwitharound11%oftheinsurancemarketgrosswrittenpremiumand7%oftheassetmanagedintheUKTheyalsodiscussthelimitationofexistingalternativestopassporting,suchasequivalenceandnegotiatingbespokedealsandlocalarrangements.14BankforInternationalSettlementsstatistics(April2016).15GeneralCourtoftheEuropeanUnion(2015).

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announcedthelooseningofsomeofthenewestmacroprudentialrequirementsinordertostrengthentheresilienceofUKbanksinanticipationofheightenedeconomicuncertainty.16InSeptember,theEuropeanCommissionhintedthatitmightnotacceptthefinalstageofBaselIIIreforms,saying,“[We]needanintelligentsolutionwhichtakesaccountoftheindividualbanks’situationsandmaintainsarisk-sensitiveapproachtosettingcapitalrequirements.Differentbankshavedifferentbusinessmodelswhichinvolvedifferentlevelsofrisk.”17Atthesametime,theU.S.FederalReserveissupportiveofmorestringentmeasuresinthelaststage.18

DifficultnegotiationsbetweentheEUandtheU.S.arenotnew.Reachinganagreementtoacceptoneanother’sderivativesrulestookthreeyears,alengthynegotiationconsideringthatalackofconvergencewouldhavebeenquitedisruptivetothederivativesmarket.Yet,whenitcomestobankingregulation,thedifferencesmaybeevenmoredeeplyingrainedinregionalspecificities.TheEUandtheUKrelyheavilyonbanks.Morethan90percentofcorporatedebtinEuropeconsistsofbankloans,withlessthan10percentcomingfromthecorporatebondmarkets.LendingintheU.S.ismorebalanced.19Furthermore,largeEuropeanbankshistoricallyhavebeengloballeadersincross-borderlending.Asaresult,theirbusinessmodel,whichoftenincludesarelativelystronginternationalexposure,mayappearlessthreateningtoEuropeanregulatorsthantotheirU.S.counterparts.TheEuropeancommissionerinchargeoftheFinancialStability,FinancialServicesandCapitalMarketsUnion,inlinewithmanyEuropeanregulators,hasrecentlyemphasizedaconceptualdifferenceinthecontextoffinalizingBaselIII:“Itisperfectlynormalforabankfocusedonlendinginasectorandregionwithlowriskstohaveloweraverageriskweightsthanabankoperatingelsewhere.”

Whenitcomestofinancialregulations,itmattersverylittlewhethertheUKispartoftheEU,asthenewregulatoryframeworkisaninternationalinitiative.BaselIIIanditsattempttostandardizeinformationsharingandassessmentmethodsenabledmorerigorousmonitoringofthebankingsector.Ultimately,theBaselreformsshouldalsoavoiddivergenceofrequirementsandminimizethecomplianceburdenacrossjurisdictions,geographicorotherwise(domesticSIFIsversusglobalSIFIs).

However,thisharmonizedregulatoryframeworkappliestocountriesthathavedifferenteconomicperformances,monetarypolicy,andfinancialmarkets.Asaresult,whileitmakesmonitoringmoreefficient,itdoesnotimplythattheappropriatepolicyresponseshouldbethesameacrosscountries.Inotherwords,differentbusinessmodelsbetweenlargeU.S.andEuropeanbanksorbetweenindustries,suchasassetmanagersandbanks,requiredifferentpolicychoices,evenintermsofmacroprudentialpolicy.

16FPClooseneditsmacroprudentialstandardsbyexcludingcentralbankreservesfromtheexposuremeasureinthecurrentUKleverageratioframework.ItalsoreducedtheUKcountercyclicalcapitalbufferrateforthelargestbanksandallowedinsurancecompaniessomeflexibilityinSolvencyIIregulationswhenrecalculatingtransitionalmeasures.SeerecordsofFPCmeetingsforJune25,July12andSeptember20.17Dombrovskis(2016).18Tarullo(2016).19BasedonBISdata,thecompositionofEU,UKandU.S.bankloan(debtissuance)canbeapproximate;90(10),71(29)and56(44)percent,respectively,Wright(2015).

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Table1.Goalsandimplementations20

Financialstability Targetedoutcome Target ImplementationFinancialServicesAct Implementanewregulatory

frameworkFinancialsystemandfinancialservices

2012,2013,and2017

Prudentialrules,suchasRequirementsDirectiveIV(CRDIV)

ImplementationofBaselIII’sprudentialregulation

Banks,buildingsocieties,andinvestmentfirms21

January2014,withfullimplementationinJanuary2019

SolvencyIIDirective HarmonizeEUinsuranceregulation

Insurers ImplementedinJanuary2016

Standardsforfinancialmarketinfrastructure

Harmonizewithinternationalstandards

Recognizedpaymentsystem,securitiessettlementsystems,andrecognizedclearinghouse(RCH)

April2013,withfullimplementationby2018-19

DepositGuaranteeSchemeDirective(DGSD)

Preventdepositorsfrommakingpanicwithdrawalsfrombanks

Banks,buildingsocieties,andcreditunion

July2015

CentralSecuritiesDepositoriesRegulation(CSDR)

HarmonizetheauthorizationandsupervisionofEUCSDsandcertainsettlementaspects,suchastimingandconductofsecuritiessettlement

Aninstitutionthatholdsfinancialinstruments,includingequities,bonds,moneymarketinstruments,andmutualfunds

September2014,withfullimplementationby2017

Financialstabilityinformationpower

ImprovingfinancialstabilitybyrequiringfirmstoprovideinformationordocumentsthatthePRAconsidersare,ormightbe,relevanttothestabilityofoneormoreaspectsoftheUKfinancialsystem.

PRAregulatedfirms June2014

SIFIs Targetedoutcome Target ImplementationDesignation/categorization Identifythedifferentdegreeof

riskaninstitutioncangenerateforthefinancialsystem

Banks,buildingsocieties,creditunions,insurers,andmajorinvestmentfirms

April201322

Stresstesting(UK&EU-widestresstest)

Assessthesystem’scapitaladequacyinordertoenhanceitsresilienceunderstress

Banks,insurancecompanies,investmentfirms,andCCPs

AttheEuropeanlevel,bankstresstestingstartedin2011,insurancein2016,CCPs

20AsofOctober2016.21Abuildingsocietyisafinancialinstitutionownedbyitsmembersasamutualorganization.Itoffersbankingandrelatedfinancialservices,especiallysavingsandmortgagelending(source:Wikipedia).22ThefirstsetofcategorizationoccurredinApril2013anddesignationoccurredinDecember2013.

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in2016.23BoEviaPRAstartedbankstresstestingin2014;forinsurance,in2016

BankandInvestmentFirmRecoveryandResolutionDirective(BRRD)

Plantoorderlymanagethefailureofafirm

Allfinancialinstitutionswithinthescopeoftheresolutionregime24

Tobeimplementedby2018.HoweverBoEonNovember2016settheMinimumRequirementforownfundsandEligibleLiabilities(MREL)tobeimplementedby202225.

Consumer/investorprotection

Targetedoutcome Target Implementation

MarketsinFinancialInstrumentsDirectiveII(MiFIDII)andtheMarketsinFinancialInstrumentsRegulation(MiFIR)

ImprovethecompetitivenessofEUfinancialmarketsbycreatingasinglemarketforinvestmentservicesandactivitiesandbyharmonizingprotectionforinvestorsinfinancialinstruments

Investmentservicesandtradingvenues

MiFIR:July2014,buttechnicalstandardsneedtobeapproved;MiFIDII:by2018

Clientassetsprotectionregime(CASS)

Protectcustomers’moneyandassetsasfundamentaltoconsumers’rights

Banks,brokers,assetmanagers,investmentfirms

June2014

Pensionreform Secureanappropriatedegreeofprotectionforconsumers,promoteeffectivecompetitionintheinterestofconsumers

Everyindividualorfirmprovidingpensionsandretirementservicesorinformationandconsumerrepresentativebodies

April2016

MortgageMarketRule Allowregulatorstodealwithfirmsthatadopthigh-riskstrategiesandintervenewherebusinessmodelsandstrategiescreateunduerisksforfirms,consumers,andthefinancialsystemgenerally

Mortgagelendersandadministrators

April2014

23ByEBA,EIOPA,andESMA,respectively.24Thebankhastheresponsibilityfortheresolutionofafailingbank,buildingsociety,orinvestmentfirmanditsgroupcompanies.CCPsarealsoseekingaresolutionplanthroughthe2012CPMI-IOSCOPrinciplesforFinancialMarketInfrastructure,asimplementedwithintheEUbyEMIR.25MRELisarequirementundertheEUBankRecoveryandResolutionDirective.Thenewruleswillbeintroducedintwophases.Bankswillbeobligedtocomplywithinterimrequirementsby2020.From1January2022,thelargestUKbankswillholdsufficientresourcestoallowtheBankofEnglandtoresolvetheminanorderlyway.

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TemporaryProductInterventionRule

ProtectconsumersintheshorttermwhileallowingeithertheFCAorindustrytodevelopamorepermanentsolution

FCA’sauthorizedfirms April2013

Marketintegrityandderivativesdealing Targetedoutcome Target Implementation

Ringfencing Separatecertainretailbankingactivitiesintoseparateentitieswithinthecorporategroup.Thesering-fencedbodiesarethenprohibitedfromcarryingoutcertainactivities,includingdealingininvestmentsasprincipal

Institutionsthathavemorethan£25billionof“coredeposit”—broadly,thosefromindividualsandsmallbusinesses—onaverage,overaperiodofthreeyears

January2019

EuropeanMarketInfrastructureRegulationonderivatives,centralcounterparties,andtraderepositories(EMIR)

Reducecounterpartyriskthatcanbecomesystemic,implementingnewriskmanagementstandards,includingreportingrequirement,andoperationalprocesses,forallbilateralover-the-counterderivatives

OTCderivatives,centralcounterparties,andtraderepositories

April2014,withfullimplementationby2019

AlternativeInvestmentFundManagersDirective(AIFMD)

IncreasetransparencybyAIFMsanddatasharingwithrelevantregulatorstoefficientlymonitorfinancialsystemsintheEU;alsoisintendedtoprotectinvestors

Hedgefundsandprivateequity

June2013,withfullimplementationby2018

SeniorManagersRegime(SMR)andSeniorInsuranceManagersRegime(SIMR)

Ensurepersonalaccountabilityofseniormanagementincaseofprofessionalmisconducts

Banks,buildingsocieties,creditunions,andPRA-designatedinvestmentfirmsandinsurancecompanies

March2016,tobeappliedto“all”registeredfinancialfirmsby2018

UndertakingsforCollectiveInvestmentinTransferableSecuritiesDirective(UCITSV)

StrengthenthelevelofprotectionforinvestorsinUCITSandharmonizethelevelofsupervisionbyEUregulators

Mutualfundsandalternativeinvestmentfunds

March2016

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About the Authors Dr.ClaudeLopezisdirectorofresearchattheMilkenInstitute,leadingtheinternationalfinanceandmacroeconomicteam.Sheinvestigatesthelinkagesbetweenthefinancialsectorandtherealeconomy,focusingonsystemicrisk,capitalflows,andinvestment.Shebringsexpertiseandexperienceontopicsincludingexchangerates,capitalflows,commodities,inflation,andtime-serieseconometrics.Herresearchhasbeenpublishedinhighlyregardedacademicjournalsandpolicyreportsandisregularlypresentedatinternationalconferences.BeforejoiningtheInstitute,LopezheldmanagementrolesandwasseniorresearcheconomistattheBanquedeFrance,thenation’scentralbank.ShewasalsoaprofessorofeconomicsattheUniversityofCincinnati.Dr.ElhamSaeidinezhadisaresearcheconomistininternationalfinanceandmacroeconomicsattheMilkenInstitute,withanemphasisonsystemicrisk,macroprudentialpolicy,andfinancialstability.Saeidinezhadisanempiricalmacroeconomistbytraining,specializinginfiscalpolicy,monetarypolicy,andproductivitygrowth.Shealsobringsexpertiseineconometricsandtime-seriesapproach.PriortojoiningtheInstitute,SaeidinezhadwasapostdoctoralresearchfellowintheFinancialStabilityResearchGroupattheInstituteforNewEconomicThinking.ShealsoheldteachingpositionsattheUniversityofSheffieldintheUKandatColumbiaUniversityinNewYork.

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